Yesterday, the Federal Reserve announced the following final, interim and proposed rulemakings addressing certain lending practices that relate to mortgages, jumbo mortgages and reverse mortgages:
- Fnal rules regarding consumer notification of mortgage loan sales or transfers;
- Fnal rules seeking to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices;
- Interim rules seeking to revise cetain disclosure requirements for closed-end mortgages;
- Proposed rules to revise escrow account requirements for jumbo mortgages; and
- Proposed rules to enhance consumer protections and disclosures for home mortgage transactions.
A brief summary of each rulemaking is provided below:
Final Rules Regarding Consumer Notification of Mortgage Loan Sales or Transfers
The Federal Reserve issued final rules amending the Truth in Lending Act (TILA) to require that consumers receive notice when their mortgage loan has been sold or assigned. The new consumer disclosure requirement is required under the Helping Families Save Their Homes Act. In particular, the Act requires a purchaser or assignee that acquires a mortgage loan to provide certain disclosures in writing within 30 days. The Federal Reserve first published interim guidance relating to the new consumer disclosure requirement in November 2009. In the final rule announced today, the Federal Reserve noted that covered parties may continue to follow the November 2009 interim guidance until the mandatory compliance date for the final rules, which is January 1, 2011.
In connection with its announcement, the Federal Reserve also issued a new online publication entitled “What you Need to Know: New Rules for Mortgage Transfers”. The publication explains to consumers what notification and disclosures they should receive from their mortgage lenders regarding mortgage transfers.
Final Rules Protecting Mortgage Borrowers From Certain Unfair Lending Practices That Can Arise From Loan Originator Compensation
The Federal Reserve issued final rules that seek to “protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.” The new rules will apply broadly to “mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.” The final rules address a common lending practice referred to as “yield spread premium.” Under this practice, a loan originator will receive more compensation from a lender if the borrower accepts an interest rate higher than the rate required by the lender.
The final rule prohibits a loan originator from:
- receiving compensation that is based on the interest rate or other loan terms, directly from the consumer, the lender or another party; and
- directing or influencing a “consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation.”
The final rules are effective April 1, 2011.
Interim Rules Revising the Disclosure Requirements for Closed-End Mortgages
The Federal Reserve issued interim rules that revise the disclosure requirements outlined for closed-end mortgages loans under Regulation Z. The interim rules implement certain provisions of the Mortgage Disclosure Improvement Act (MDIA) that “require lenders to disclose how borrowers' regular mortgage payments can change over time.”
The MDIA, which amended the Truth in Lending Act, "seeks to ensure that mortgage borrowers are alerted to the risks of payment increases before they take out mortgage loans with variable rates or payments.” Under the interim rules, a lender's cost disclosure must include a payment summary in tabular form that provides the following:
- initial interest rate together with the corresponding monthly payment;
- adjustable-rate or step-rate loans, the “maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan;” and
- a statement that consumers might not be able to avoid increased payments by refinancing their loans.
- Pursuant to the interim rules, a lender will be required to disclose certain loan features which include balloon payments or options to make only minimum payments that will cause loan amounts to increase. Although lenders must comply with the interim rule for applications they receive on or after January 30, 2011, they will have the option of providing disclosures that comply with the interim rule before that date.
The comment period on the interim rulemaking ends 60 days after publication of the proposal in the Federal Register.
Proposed Rules to Revise Escrow Requirements for Jumbo Mortgages
The Federal Reserve issued proposed rules to revise the “escrow account requirements for higher-priced, first-lien 'jumbo' mortgage loans.” The proposed rulemaking, which implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would increase the current annual percentage rate (APR) threshold “used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans.” Jumbo loans under the Dodd-Frank Act are loans exceeding the conforming loan-size limit for purchase by Freddie Mac.
In 2008, the Federal Reserve issued final rules requiring “creditors to establish escrow accounts for first-lien loans if a loan's APR is 1.5 percentage points or more above the applicable prime offer rate. ” The Dodd-Frank Act amends TILA to apply the escrow requirement to jumbo loans that have an APR 2.5 percentage points or more above the applicable prime offer rate. The APR threshold for non-jumbo loans remains unchanged. The comment period on the proposed rulemaking ends 30 days after publication of the proposal in the Federal Register.
Proposed Rules on Enhancing Consumer Protections and Disclosures for Home Mortgage Transactions
The proposed rules on enhanced consumer protections and disclosures for home mortgage transactions include “significant changes to Regulation Z (Truth in Lending) and represents the second phase of the Board's comprehensive review and update of the mortgage lending rules in the regulation.”
The proposed rulemaking seeks to:
- enhance consumer disclosures consumers received in connection with “reverse mortgages and impose rules for reverse mortgage advertising to ensure advertisements contain accurate and balanced information”;
- prohibit “certain unfair practices in the sale of financial products with reverse mortgages”;
- improve consumer disclosures that “explain a consumer's right to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right”; and
- require that consumers receive new disclosures when key terms of an existing closed-end mortgage loan are modified.
In addition, the Federal Reserve proposed amendments relating to all types of mortgages that would:
- ensure that consumers have adequate time to review their “loan cost disclosures before they become obligated for fees, by requiring lenders to refund the fees if the consumer decides to withdraw the application within three days after they receive the disclosures;” and
- clarify that "when a consumer requests information from their loan servicer about the owner of the loan, the servicer must provide the information within a reasonable time, which generally would be 10 business days.”
- The comment period on the proposed rulemaking ends 90 days after publication of the proposal in the Federal Register.