Fed Approves New Mortgage Loan Rules
The Board of Governors of the Federal Reserve recently approved a final rule amending Regulation Z (Truth in Lending) and the Home Ownership Equity Protection Act (HOEPA). The purpose of the new rule, according to Federal Reserve Chairman Ben Bernanke, is to "protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting home ownership." The highlights of the new rule are as follows:
The final rule imposes certain restrictions on lenders in relation to "higher priced mortgages." This term is broadly defined to capture virtually all loans in the subprime market while at the same time excluding loans in the prime market. Lenders are prohibited from making a loan without verifying the borrowers' ability to repay the loan from income and assets other than the mortgaged property. Targeted directly at the practice of offering adjustable rate mortgages (ARMs) with low initial payments, compliance with this regulation requires lenders to assess repayment ability based on the highest scheduled payments in the first seven years of the loan. In a similar vein, prepayment penalties are prohibited when payments may change within the initial four years of the loan. More importantly, lenders may incur liability for violating these standards on a case-by-case basis, as borrowers will not have to demonstrate that any violations are part of a larger pattern or practice.
Advertising for all mortgage loans, regardless of type, priority or the nature of the collateral, must contain additional information about rates, monthly payments and other loan features, such as the effect of discounted rates, the existence of a balloon payment, deductibility of certain kinds of interest for tax purposes, and the extent of promotional or introductory rates. Certain specific advertising practices thought to be misleading or deceptive are also banned.
Compliance with this final rule becomes mandatory on October 1, 2009.
