► On and after Thursday, Oct. 1, 2009, creditors will be required to implement new rules, pursuant to revisions to Regulation Z issued by the Federal Reserve Board (FRB) on July 14, 2008.1
► Regulation Z (12 CFR 226.35) defines a higher-priced mortgage loan as a consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate (APR) exceeding a certain percentage.2
► Higher-priced mortgage loans include closed-end purchase money, refinancing and home equity loans.
► Exclusions: Home equity lines of credit (HELOCs), reverse mortgages, construction-only loans and bridge loans with a term of no more than 12 months.
Average prime offer rate
The classification as a higher-priced mortgage loan is based on the following:
● First liens: The APR exceeds the average prime offer rate for a comparable transaction as of the rate-lock date by 1.5 percent or more.
● Subordinate liens: The APR exceeds the average prime offer rate for a comparable transaction as of the rate-lock date by 3.5 percent or more.
► On a weekly basis, the FRB will publish the average prime offer rate for a wide range of transaction types on its Website (www.federalreserve.gov). Initially, the FRB will base these rates on Freddie Mac’s Primary Mortgage Market Survey (PMMS), which contains weekly average rates and points offered by a representative sample of creditors to prime borrowers seeking first-lien, conventional, conforming mortgages who would have at least 20 percent equity. You can view the PMMS by clicking here.
Four key consumer protections
● Borrower ability: Lenders must take a borrower’s ability to repay the loan from income and assets other than the home's value into account when making the loan. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. A borrower does not need to demonstrate a “pattern or practice,” in order to show that a lender violated this prohibition.
● Verification of income and assets: Lenders must verify the income and assets they rely upon to determine repayment ability.
● Prepayment penalty: Prepayment penalties are prohibited if the mortgage payments can change in the first four years; and, for other higher-priced loans, a prepayment penalty period cannot last for more than two years.
● Escrow accounts: Lenders must establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.
Develop policies and procedures to:
A. Determine a borrower’s:
1. Current and expected income
3. Assets (other than the collateral)
4. Current obligations (i.e., credit, mortgage related payments)
B. Determine a borrower’s income by utilizing:
1. IRS Form W-2 and other income reporting forms
2. Income tax returns
3. Payroll receipts
4. Records from banks and financial institutions
5. Other supporting, verifiable documentation
C. Assure that prepayment penalties, where permitted by law, meet all these criteria:
1. The amount of the periodic payment of principal or interest (or both) does not change during the loan’s first four years
2. The penalty does not apply after the loan’s first two years
3. The prepayment penalty does not result from a refinancing by the same creditor (or an affiliate of the creditor)
D. Establish escrow accounts:
1. Prior to loan consummation (to collect for property taxes and property insurance)
2. With a provision to allow the borrower to opt out after the first year by giving written notice to the creditor, if the creditor is offering an opt out provision (although the creditor is not actually required to offer an opt out provision)
Submit your questions …
Do you have a regulatory compliance issue that you’d like to see addressed in the Regulatory Compliance Outlook Column? If so, e-mail your issue or concern to Jonathan Foxx at [email protected]
Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456.
1—The FRB has delayed the mandatory compliance date for escrows for covered loans secured by site-built homes until April 1, 2010 and until Oct. 1, 2010 for covered loans secured by manufactured housing.
2—I have written extensively on this in several Advisory Bulletins for our clients. These can be found in the Archive of Lenders Compliance Group at www.lenderscompliancegroup.com. See, inter alia, “FRB Finalizes Revision to Regulation Z (TILA),” 07/28/08.