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InfoBytes Alert

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

July 14 , 2008

Buckley Kolar Webinar This Thursday 7/17/08 1PM EST

Buckley Kolar lawyers will host a special webinar this Thursday, July 17, 2008 at 1PM EST to discuss the provisions of this rule and its implications for mortgage lenders. To register a site, please e-mail us at .

The Federal Reserve Board today issued a final rule addressing numerous practices that have been wide-spread in both the prime and subprime 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.

Requirements Applicable to "Higher-Priced Mortgage Loans"

The Board has created a new category of "higher-priced mortgage loans" intended to capture all subprime 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.

Requirements Applicable to All Closed-End Mortgage Loans Secured by a Consumer's Principal Dwelling

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.

Areas Addressed in the Proposed Rule That Are Omitted From the Final Rule

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.

Effective Dates

Compliance with all provisions of the final rule, other than the escrow requirement, is mandatory for all mortgage loan applications received on or after October 1, 2009. The effective date of the escrow requirement is April 1, 2010 for site-built homes, and October 1, 2010 for manufactured homes.

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