Over the last year, the Federal Reserve Board has promulgated a raft of rules to amend Regulation Z, all intended to improve the state of disclosure about the true cost of credit for the benefit of consumers. In July of 2009, the Board took aim at amending Regulation Z to improve the disclosures given in connection with home purchase loans and refinancings of those loans secured by real property or the consumer’s dwelling. The nature and timing of the Board’s proposed disclosures will add yet another layer of complexity to mortgage originators already burdened with changes at the state level in licensing for mortgage loan originators.
As proposed, the Board’s rules would revise the disclosures given in connection with closed-end credit, at different stages of the loan application process. For example, when consumers apply for credit, the creditor must give them a list of questions prepared by the Board that, if asked by consumers, will aid consumers in their decision-making about the mortgage loan. The one-pager targets adjustable rate loans (“ARMs”) and no-doc loan practices that have faded somewhat in light of the current recession and tightening of underwriting standards in the extension of mortgage credit. For example, the one-pager instructs the consumer to ask whether the interest rate on the loan for which the consumer applies can increase or whether the consumer has the employment, income, and assets to obtain the loan, as no-doc and low-doc loans “usually have higher interest rates or higher fees than other loans.” The consumer would also receive a new publication called “Fixed vs. Adjustable Rate Mortgages” that would replace the lengthy Consumer Handbook on Adjustable-Rate Mortgages. In addition to the new disclosures at application, the Board also proposes to “streamline” the information consumers receive within three days after application. Again, the Board emphasizes the “riskier” features of loan programs to arm consumers with enough information to make a decision. The proposed rules would require creditors to show consumers, for example, how their payments might change in connection with ARMs. The proposed rules focus on loans with adjustable rates or payment options, and would require creditors to notify consumers 60 days in advance of a change in their monthly payment, as well as include a notice in monthly statements explaining how the balance of a loan will increase based on a payment option.
The Board also proposed to revamp the disclosure of the annual percentage rate (“APR”). Currently, Regulation Z allows creditors to exclude numerous charges from the APR. The Board proposed to make the APR more inclusive to benefit consumers with a cost disclosure that includes fees that “better represent the full cost of credit undiluted by myriad exclusions, the basis for which consumers cannot be expected to understand.” The Board also stated that this revised, inclusive APR should allow consumers to evaluate competing mortgage products on the basis of a single factor. As a better measure of the total cost of the loan, the new APR would include most fees and settlement costs currently excluded from the APR in connection with mortgage loans. The Board, in revamping the APR disclosure, noted that excluding voluntary or optional charges from the APR does not mesh with TILA’s purpose of disclosing the “cost of credit,” which includes charges imposed “as an incident to the extension of credit,” without reference to the voluntary or optional nature of the charge. Additionally, to make the APR an even-more powerful shopping tool for consumers, the proposed rules would require creditors to give consumers a simple graph that shows how their loan’s APR compares to the average rate offered to borrowers with “excellent credit.” Finally, the proposed rules draw a new line in the sand for consumers, requiring, in addition to the early cost disclosures at application, final TILA disclosures that consumers must receive at least three days before the loan closing – a time frame intended to give consumers the ability to continue shopping if the cost of the loan increased since receipt of the early disclosures.
In addition to the new disclosure requirements, the Board takes aim at certain substantive practices that it associates with so-called “predatory” practices. For example, the proposed rules would prohibit payments to a mortgage broker or the creditor’s loan officer based on the loan’s interest rate or other terms. The proposed ban on yield spread premiums or overages intends to eliminate the incentive to provide consumers with higher interest rates or other less favorable terms. The proposed rule considers compensation based on loan amount as a payment based on a term or condition of the loan. The request for comments to the proposed rule make clear, however, that acceptable means of compensation might include compensation based on the originator’s loan volume, performance of loans delivered by the originator or hourly wages.
The proposed rule also would ban mortgage brokers and loan officers from “steering” consumers to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation. If adopted, the rule would impose a duty on the broker or originator not to put a consumer in a higher cost loan when such loan does not further the consumer’s interest. The Board also proposed creating a safe harbor whereby a broker or originator would have a shield from liability where they presented at least three loan options for each type of transaction of interest to the consumer and the consumer chose a loan.
Commenters must respond to the Board’s proposed close-end mortgage rules by November 27, 2009.
Cathy Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.