WASHINGTON (1/10/08)—Credit unions and other interested parties have until April 8 to comment on the Federal Reserve Board’s proposed Regulation Z changes intended, in part, to address certain subprime lending practices. The proposed revisions spanned 141 pages in the Jan. 9 Federal Register
, which set the deadline for public comment. The proposed rules changes are meant to better protect consumers from unfair or deceptive home mortgage lending practices and related advertising under the Truth in Lending and Home Ownership and Equity Protection Acts. The Fed’s plan would apply four protections to a newly defined category of “higher-priced mortgages,” which would include those with annual percentage rates (APRs) that exceed the yield on Treasury securities of comparable maturity by at least three percentage points for first-lien loans, or five percentage points for subordinate-lien loans. This threshold should include nearly all subprime loans. For these higher-priced mortgages:
* Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers' ability to repay the loan; * Creditors would be required to verify the income and assets they rely upon in making a loan; * Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase; and * Creditors would have to establish escrow accounts for taxes and insurance.
For most other mortgages, including the “higher-priced” mortgages, the proposal would:
* Prohibit lenders from paying mortgage brokers “yield spread premiums” that exceed the amount the consumer had agreed in advance that the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. *Prohibit certain servicing practices, such as failing to credit a payment to a consumer’s account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, failing to provide a schedule of fees upon request, and imposing late fees under certain circumstances. *Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home. *Prohibit seven misleading or deceptive advertising practices for closed-end loans, such as using the term “fixed” to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as introductory or “teaser” rates; and * Provide Truth-in-Lending disclosures to borrowers within three days of application so it is early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.
The Credit Union National Association will soon issue a comment call to credit unions on the Reg Z revisions.