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
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
" 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
" 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"
" 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
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
" 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
" 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
"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 www.federalreserve.gov.