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Final
Reg Z Rule a Reality
The Federal
Reserve Board (FRB) has issued the Final Rule amending the
mortgage lending provisions of Regulation Z (Truth in Lending) and
the Commentary. The changes provide additional consumer protections
for mortgage and home-equity loans. The Rule applies to all
creditors, including nonbank mortgage lenders and brokers.
The
FRB reviewed 4700 comment letters after the proposal was issued in
January of this year. The Final Rule reiterates the goals of the
amendment which include:
·
Protecting
consumers in the mortgage market from unfair, abusive, or deceptive
lending and servicing practices while preserving responsible lending
and sustainable homeownership;
·
Ensuring that
advertisements for mortgage loans provide accurate and balanced
information and do not contain misleading or deceptive
representations; and
·
Provide
consumers transaction-specific disclosures early enough to use while
shopping for a mortgage.
Before
reviewing the specific provisions of the Rule, it is important to
recognize that a newly-defined category of higher-priced mortgage
loans is being created. The definition “higher-priced mortgage
loan” (HPML) is a first-lien mortgage with an annual percentage
rate (APR) that is at least 1.5 percentage points, or a
subordinate-lien loan with an APR of 3.5 percentage points, above
the “average prime offer rate.” The “average prime offer
rate” is a new benchmark based on Freddie Mac’s weekly Prime
Mortgage Market Survey. This definition means the Rule captures
virtually all loans in the subprime market, but generally excludes
loans in the prime market
This
category includes
home purchase loans, refinancing of such loans, and home
improvement loans. It does
not include home equity lines of credit (HELOCs), reverse
mortgages, or construction-only and bridge loans.
Protections
For
HPMLs the Rule
provides four protections. Lenders
must:
·
Consider a
borrower’s ability to repay, based on the highest payment in the
first seven years of a loan, before making the loan.
·
Verify income
or assets before relying on them for repayment ability.
·
Not require
prepayment penalties if the payment may change in the first four
years. For other high-priced loans, prepayment penalty periods may
not last more than two years.
·
Establish an
escrow account for property taxes and homeowners’ insurance for
first-lien loans, and allow cancellation after one year. The lender
may offer the borrower the opportunity to cancel the escrow account
after one year.
For all
closed-end mortgages secured by a consumer’s principal
dwelling [whether or not an (HPML)]:
·
Servicers may
not fail to credit a payment on the date it is received; fail to
give a payoff statement in a reasonable time; or pyramid late fees.
·
Lenders may
not coerce or encourage an appraiser to misrepresent the value of a
home.
·
Lenders must
offer a good faith estimate (GFE) of loan costs and a payment
schedule within three days after application for any loan, including
a home improvement loan or a refinanced loan. (The early GFE was not
previously required for home improvement or refinanced loans.)
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