New Regs on Subprime Lending Now in Effect

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Without much fanfare the new rules governing home mortgage loans went into effect yesterday, October 1st, 15 months after the new rules were issued.  Beginning yesterday, lenders must now must evaluate a borrower's ability to repay the loan, must verify a borrower's stated income, and cannot impose a prepayment penalty if the monthly payment can change during the loan's first four years.  Still these rules don't come soon enough -or go nearly far enough to protect consumers, "despite repeated urging by consumer advocates across the country and even by other government agencies" See: Watchdog Fed didn't Bother Barking over at Americans For Fairness in Lending.
The new regs amend Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA) and adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. 

For loans in this category, these protections will:

 *Prohibit a lender from making a loan without regard to borrowers' 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."

 *Require creditors to verify the income and assets they rely upon to determine repayment ability.

 *Ban 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. This rule is substantially more restrictive than originally proposed.

 *Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer's principal dwelling, regardless of whether the loan is higher-priced:

 *Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.

 *Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.  In addition, servicers are required to credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.

 *Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.  Currently, early cost estimates are only required for home-purchase loans.  Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.

For all mortgages, the rule also sets additional advertising standards.  Advertising rules now require additional information about rates, monthly payments, and other loan features.  The final rule bans seven deceptive or misleading advertising practices, including representing that a rate or payment is "fixed" when it can change. 

The rule's definition of "higher-priced mortgage loans" will 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-lien 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, but the expected market coverage is similar.

These regs took effect yesterday, October 1, with the single exception being the escrow requirement, which will be phased in during 2010.

Press Release July, 2008

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