In response to significant pressure from Congress, the Federal Reserve Board (FRB) recently proposed sweeping amendments to Regulation Z, which implements the Truth in Lending Act (TILA). The FRB is proposing these rules in response to the subprime lending crisis and is trying to balance the protection of borrowers from unfair lending practices with responsible access to credit and home ownership.
The proposed rules seek to increase protections for most closed-end residential loans; develop additional requirements for a new category of loans, "higher-priced mortgage loans;" provide for changes to TILA's advertising rules; and require that borrowers receive TILA disclosures earlier in the lending process. Under the proposed amendments, borrowers could bring actions for most rule violations and could recover actual damages; statutory damages ($2,000 per individual and the lesser of $500,000 or 1% of the creditor's net worth for class actions); finance charges and fees that the borrower paid in the loan at issue; and attorney's fees.
Closed-End Loans Secured By a Borrower's Principal Dwelling
The FRB proposed the following protections for all closed-end loans secured by a borrower's principal dwelling.
- Written Agreement for Broker Compensation— A broker would obtain a written agreement from a borrower before the submission of an application or payment of any fee from the borrower, whichever is earlier. This agreement would require the disclosure of all fees paid to the broker, including a yield spread premium, as a dollar amount and provide the borrower with additional information such as the presence of a potential conflict of interest between the lender and the broker. This agreement also would be provided in a tablefunding transaction.
- Prohibitions of Appraiser Coercion — A lender or broker could not require, encourage, or coerce an appraiser to draft an inaccurate appraisal.
- Servicer Requirements— Servicers would have to credit a borrower for the borrower's payment on the date of the payment's receipt and provide a fee schedule to a borrower upon the borrower's request
Higher-Priced Mortgage Loans
The proposed rules also place restrictions on a new category mortgage loans, "higher-priced mortgage loans." A higher-priced mortgage loan has a lower threshold than a Home Ownership and Equity Protection Act (HOEPA) loan. A higher-priced mortgage loan is defined as a closed-end, consumer purpose loan that is secured by a principal dwelling and that, for first liens, has an annual percentage rate (APR) of three or more percentage points and, for second liens, has an APR of five or more percentage points over the comparable treasury rate at the loan’s consummation. The FRB proposed to give higher-priced loans the following protections.
- Ability to Pay Must be Considered — A lender must analyze a borrower's payment ability, which includes taking into consideration a borrower's current and "reasonably expected" employment, income and assets.
- Verification of Income and Assets — A lender would ensure that a borrower's income and assets are verified prior to making a loan.
- Prepayment Penalty Limitations— The FRB would extend HOEPA prepayment penalty limitations to higher-priced loans.
- Escrow Accounts Required — A borrower would need an escrow account established for their taxes and insurance but would have the option to opt out of the escrow twelve months after the loan’s consummation.
Advertisements for Closed-End Mortgage Loans
The FRB is proposing the elimination of the following practices that it has labeled as deceptive.
- Variable Loans as Fixed Rate Loans — The proposed rules seek to prohibit any confusing advertisements drafted to make a consumer think that a variable rate is fixed for the life of a loan.
- "Government Loan Programs" or "Government-Supported Loans" — Advertisements may not state that FHA or VA loans are "government loan programs" or "government-supported loans.
- Reference to the Borrower's Current Lender — An advertisement may not reference a borrower's current lender unless it clarifies that the soliciting lender or broker is not affiliated with the current lender.
- Debt Elimination Claims — An advertisement must state that a loan would replace one debt with another, not eliminate a borrower's other debts.
- Fiduciary Relationship Between Borrower and Lender or Broker — A lender or broker may not advertise that it has a fiduciary relationship with a borrower.
Through its proposed rule, the FRB hopes to help borrowers gather as much information as possible while shopping for a loan. Similar to the disclosure requirement for purchase-money mortgages, the proposed rule would have lenders provide TILA disclosures (APR and payment schedule) no later than three days after application. In early 2008, the FRB has indicated that it will test updated TILA mortgage disclosures that are designed to help borrowers understand new, complex loan products.
The proposed rule was published in the Federal Register on January 9, 2008. Comments must be received within ninety days.