110th CONGRESS, LEGISLATIVE ISSUES A - Z
FEDERAL RESERVE'S PROPOSED REGULATION Z AMENDMENTS
ISSUE: The Federal Reserve Board (the “Fed”) is charged with protecting consumers from unfair or deceptive home mortgage lending and advertising practices. The Fed’s Regulation Z, or “Reg Z”, is the implementing regulation, amended on occasion, for the Truth in Lending Act (TILA) of 1968. TILA requires lenders to clearly disclosure the terms and costs of lending transactions.
The Home Ownership and Equity Protection Act (HOEPA) amended TILA to require lenders to provide certain disclosures for loans secured by the consumer's home. The sale of certain “higher-priced loans”, as defined by HOEPA, requires leaders to provide increased disclosures and makes them subject to increased restrictions.
Given the foreclosure crisis in the subprime home mortgage lending market and the subsequent credit crunch in the home lending industry, Congress has been considering legislation to protect homeowners from perceived abuses by the mortgage brokerage, lending, and securitization industries. In addition, the Fed has also issued proposed rules that accomplish many of the same goals as those in pending Senate legislation or H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007.
CUNA POSITION: CUNA agrees that this crisis must be addressed and applaud well meaning efforts by the Congress, the Bush Administration, and the Federal Reserve to remedy the problem. Credit unions, by and large, don’t have lending portfolios heavy with subprime ARM mortgages. This is because credit unions are generally conservative in their lending practices and also because credit unions exist to serve the best interest of their members. This prevents credit unions from selling mortgages that they know a borrower will have difficulty repaying every month. In fact, House Financial Services Committee Chairman Barney Frank (D-MA) has repeated stated that this mortgage lending crisis likely would not have happened if other sectors of the mortgage industry had been regulated like banks and credit unions.
However, CUNA is concerned about the unintended consequences of pending legislation and proposals. In addition, CUNA is studying the potential increased costs of compliance and the additional paperwork and reporting requirements mandated by proposals from the Congress, the Bush Administration, and the Fed.
STATUS/OUTLOOK: On December 18, 2007, the Fed made public a proposed rule to modify Reg Z under the authority granted to it by the Home Ownership and Equity Protection Act of 1994 (HOEPA). The proposal would limit certain practices by home mortgage originators and lenders. In addition, certain mortgage disclosure documents would have to be provided earlier than is currently required. The comment period lasts ninety days, after which the Fed will issue its final regulations.
The Fed’s proposal includes protections for “higher-priced mortgages”. The rule defines such loans as “higher-priced” if they are first-liens and have an annual percentage rate (APR) three percentage points or more above the yield on comparable U.S. Treasury securities, or if they are subordinate-lien mortgages with an APR exceeding the comparable Treasury rate by five percentage points or more. The following are proposed consumer protections involving these “higher-priced” mortgages:
- Lenders must consider a borrowers ability to repay the mortgage loan.
- Lenders would be required to more vigorously verify the consumer’s income and assets before making a mortgage loan.
- Prepayment penalties would be banned in all but a few instances. Exceptions would be made if certain conditions are met, including loans with provisions that no penalties would be levied for at least sixty days before any payment increases.
- Lenders would have to establish escrow accounts for taxes and insurance.
The Fed’s proposal would also apply a series of consumer protections to all home mortgage loans secured by a primary dwelling:
- “Yield-spread premiums” would be banned in most instances. This practice involves lenders who compensate mortgage brokers through such “premium” payments when brokers sell higher-rate loans to a consumer. However, if a mortgage broker discloses his or her total compensation from the transaction to the consumer and obtains the consumer’s written consent, that broker may initiate the sale of such a higher-rate loan and collect the “yield-spread premium” from the lender.
- Lenders and other mortgage originators would be prohibited from coercing real estate appraisers to misstate home value.
- Home mortgage loan servicers would be required to credit consumers’ loan payments as of the date of receipt and would have to provide a fee schedule if requested by the consumer.
The proposed new guidelines also place additional requirements on the advertising practices of home mortgage lenders and brokers, specifically the advertisement of mortgage rates and monthly payments. Other misleading practices would be banned, such as representing a mortgage rate as fixed, when in reality, it is subject to change.
Finally, the Fed’s proposal would require lenders to provide a good faith estimate of the full cost of a home mortgage loan. For example, the consumer would have to be given 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. Current law only requires such early cost estimates for home-purchase loans. Also, lenders would be prohibited from charging fees to consumers until after they receive the early disclosures. An exception would be made for a reasonable fee for the lender to obtain the consumer’s credit report and score.
Many in the mortgage lending industry were hopeful that the Fed’s action would be sufficient to stave off Congressional legislation. However, many leaders in Congress have stated that the Fed’s Regulation Z amendments “do not go far enough” in cracking down on what they perceive to be abusive and misleading practices in the industry. Such detractors include House Financial Services Chairman Barney Frank (D-MA) and Senate Banking Chairman Christopher Dodd (D-CT).
CUNA’s Consumer Protection Subcommittee is reviewing the Fed’s proposal in detail to develop a response.
CUNA’s analysis of other legislative and Administration proposals to mitigate the effects of the subprime mortgage crisis can be accessed by clicking on the following links:
CUNA will continue to closely monitor this rapidly changing situation to ensure that credit unions retain the ability to provide safe and affordable mortgage products to their members.
CONTACT: John Hildreth, (202) 508-6724, jhildreth@cuna.coop
