The Federal Reserve Board Approves A Final Rule Amending Reg Z For Home Mortgage Loans

July 15, 2008

By John L. Day, Jr., Esq.

On Monday, July 14, 2008, the Federal Reserve Board approved a final rule for home mortgage loans to “better protect consumers and facilitate responsible lending”.  The rule is designed to prohibit unfair, abusive or deceptive home mortgage lending practices and restrict certain other mortgage practices. 

The final rule, which amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), largely follows a proposal released by the Board in December 2007.

The rules adopt the following protections for ALL loans secured by a consumer’s principal dwelling:

  • Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value
  • Servicers are prohibited from pyramiding late fees 
  • Servicers are required to credit consumer’s loan payments as of the date of receipt
  • Servicers are required to provide a payoff statement within a reasonable time of request, generally five days from receipt
  • Creditors must provide a good faith estimate of the loan costs within three days after a consumer applies for any mortgage loan, even where the debtor is refinancing
  • Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumers’ credit histories

The final rule established new requirements for “higher-priced mortgage loans”, intended to capture virtually all loans in the subprime market, but generally exclude loans in the prime market.  To provide an index, the Federal Reserve Board will publish the “average prime offer rate”, based on a survey currently published by Freddie Mac.  A loan is “higher-priced” if it is a first mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index, or 3.5 percentage points if it is a subordinate-lien mortgage.  This definition overcomes certain technical problems with the original proposal, which was 3% over prime for first mortgages and 5% over prime for subordinate-liens, but the expected market coverage is similar.

For “higher-priced mortgage loans” there are new consumer protections:

  • Prohibits a lender from making a loan without regard to a consumer’s ability to repay the loan from income and assets other than the home’s value.

– A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan
– To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice”
– A creditor must consider a “piggyback” second-lien transaction of which it has knowledge that is used to finance part of the down payment on the house
– Prohibits a creditor from extending credit to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability
– Requires creditors to verify the income and assets they rely upon to determine repayment ability

  • Bans any prepayment penalty if the payment can change in the initial four years.  For other higher-priced loans, a prepayment penalty period cannot last for more than two years
  • Requires creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans

The new rules take effect on October 1, 2009, except for the new escrow requirement, which will be phased in during 2010.

If you have any questions on this information, please contact Mr. John L. Day, Jr., Esq.

Mr. Day is a partner in the Bankruptcy Department of the Real Estate Default Group at Weltman, Weinberg & Reis Co., L.P.A. in Cincinnati, Ohio. Mr. Day can be reached at (513) 723-2206 or via e-mail at jday@weltman.com.

Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation.  The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship.  Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles.(c)2008

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