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Jul 29, 2008

Federal Reserve Board issues new mortgage ruleMortgagePress.comFederal Reserve Board, HOEPA, sub-prime loans, Freddie Mac Primary Mortgage Market Survey, escrow requirements The Federal Reserve Board has issued a final rule addressing numerous practices that have been widespread in both the prime and sub-prime mortgage markets. The rule (1) creates a new category of "higher-priced mortgage loans" subject to new requirements; (2) imposes new requirements related to closed-end mortgages secured by a consumer's principal dwelling; and (3) imposes new requirements related to all mortgage loans. Compliance with all provisions of the final rule, other than the escrow requirement, is mandatory for all mortgage loan applications received on or after Oct. 1, 2009. The effective date of the escrow requirement is April 1, 2010 for site-built homes, and Oct. 1, 2010 for manufactured homes. The Board has created a new category of "higher-priced mortgage loans" intended to capture all sub-prime loans. A loan is a "higher-priced mortgage loan" if it exceeds the average prime offer rate from the Freddie Mac Primary Mortgage Market Survey for comparable transactions (1) by 150 basis points for first-lien loans, or (2) by 350 basis points for subordinate-lien loans. HELOCs, construction loans, "bridge" loans and reverse mortgage are expressly excluded. Among the requirements applicable to higher-priced mortgage loans are the following: " Lenders may not make a higher-priced mortgage loan without regard to a borrower's ability to repay the loan based on the borrower's income and assets other than the home. A lender generally is presumed to have complied with this requirement if the lender: Verifies the consumer's repayment ability (e.g., verifying the consumer's income, assets and current obligations); assesses repayment ability "using the largest payment of principal and interest scheduled in the first seven years following consummation and taking into account current obligations and mortgage-related obligations"; and takes into account either the consumer's debt-to-income ratio, or the income the consumer will have after paying debt obligations. A borrower can show that a lender has violated this prohibition without needing to demonstrate that the violation is part of a "pattern or practice." " Lenders may not rely on income or assets that the lender does not verify in determining repayment ability. " Lenders may not charge a prepayment penalty unless the penalty does not apply to prepayments made after the first two years of the loan; the penalty does not apply if the source of the money used for the prepayment is a refinancing by the creditor or an affiliate of the creditor; and the consumer's payment cannot change during the first four years of the loan. " Lenders must establish an escrow account to pay property taxes and homeowners' insurance for first-lien loans. The lender may offer the borrower the opportunity to opt out of the escrow requirement after one year. In addition to requirements imposed on "higher-priced mortgage loans," the new rule imposes new requirements on all closed-end mortgage loans secured by a consumer's principal dwelling (whether or not the loan is also a higher-priced mortgage loan). These requirements include: " A servicer may not: Fail to credit a payment to a borrower's account as of the date the payment is received; fail to provide a payoff statement within a reasonable period of time; or "pyramid" late fees. " A lender or broker may not "coerce, influence or otherwise encourage" an appraiser to misstate or misrepresent the value of a home. Examples of such "encouragement" include "[t]elling an appraiser a minimum reported value of a consumer's principal dwelling that is needed to approve the loan." " Lenders must provide a good faith estimate of the loan costs, as well as a schedule of payments, within three days after application (the early TIL statement). (Previously, the early TIL statement was only required on purchase money transactions.) Requirements applicable to all mortgage loans The new rule also creates new requirements related to all mortgage loans. These include: " Requirements that advertising materials contain additional information about rates, monthly payments, and other loan features. " Prohibitions on seven practices the Board considers deceptive or misleading, including any representation that a rate or payment is "fixed" when it can change. While the new rule is sweeping in its scope, it omits a number of provisions that the Board had included in its initial proposal. These omissions include: " Yield spread premiums. The Board notes, however, that it intends to analyze alternative approaches to YSPs as part of its ongoing review of the rules applicable to closed-end credit under Regulation Z. " Broker disclosures. At the meeting where the Board approved the rule, the Board staff indicated that it is continuing to work on this issue. " Servicing fee disclosure. Due to the significant burden it would impose, the Board eliminated from the final rule the proposed requirement that servicers provide a comprehensive fee disclosure. "I applaud the Federal Reserve Board's decision today to issue final, strengthened rules under HOEPA that will correct many of the abuses which led to the current housing crisis and help assure that mortgage borrowers have stronger, more consistent consumer protections regardless of the lender they are using or the state where they reside," said Federal Deposit Insurance Corporation (FDIC) Chairman Sheila C. Bair. "I am particularly pleased that the FRB eliminated the "pattern or practice" requirement to demonstrate a violation of the ability to repay standard. This change will strengthen our ability to enforce a fundamental rule of underwriting: that all lenders, banks and nonbanks, should only make loans where they have documented a reasonable ability on the part of the borrower to repay. I also commend the Board's decision to crack down on abusive prepayment penalties. After two years, subprime borrowers who have made regular payments on their mortgages should have the opportunity to refinance into lower cost loans without penalty. These final rules will assure their ability to do so, and will also assure that those with adjustable-rate mortgages will not be caught having to pay penalties to avoid steep resets through refinancing." For more informaiton, visit
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