Fed
Proposes Amendments to Truth in Lending Act in Response to Subprime Mortgage Crisis
By:
Josh Davin Morton
On December 18, 2007, the Federal Reserve Board proposed and asked for public comment on changes to Regulation Z, which implements the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA).
The proposed amendments are intended to (i) protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable homeownership, (ii) ensure that advertisements for mortgage loans provide accurate and balanced information and do not contain misleading or deceptive representations, and (iii) provide consumers transaction-specific disclosures early enough to use while shopping for a mortgage.
A. Proposals to Prevent Unfairness, Deception, and Abuse
The Board is proposing seven new restrictions or requirements for mortgage lending and servicing.
1. Protections covering higher-priced mortgage loans
The Board is proposing four protections for consumers receiving higher-priced mortgage loans. These loans would be defined as consumer-purpose, closed-end loans secured by a consumer’s principal dwelling and having an annual percentage rate (APR) that exceeds the comparable Treasury security by three or more percentage points for first-lien loans or five or more percentage points for subordinate-lien loans.
For higher-priced mortgage loans, the Board proposes to:
(i) Prohibit creditors from engaging in a pattern or practice of extending credit without regard to borrowers’ ability to repay from sources other than the collateral itself;
(ii) Require creditors to verify income and assets they rely upon in making loans;
(iii) Prohibit prepayment penalties unless certain conditions are met; and
(iv) Require creditors to establish escrow accounts for taxes and insurance, but permit creditors to allow borrowers to opt out of escrows 12 months after loan consummation.
In addition, the proposal would prohibit creditors from structuring closed-end mortgage loans as open-end lines of credit for the purpose of evading these rules, which do not apply to lines of credit.
2. Protections covering closed-end loans secured by consumer’s principal dwelling
In addition, in connection with all consumer–purpose, closed-end loans secured by a consumer’s principal dwelling, the Board is proposing to:
(i) Prohibit creditors from paying a mortgage broker more than the consumer had agreed in advance that the broker would receive;
(ii) Prohibit any creditor or mortgage broker from coercing, influencing, or otherwise encouraging an appraiser to provide a misstated appraisal in connection with a mortgage loan; and
(iii) Prohibit mortgage servicers from “pyramiding” late fees, failing to credit payments as of the date of receipt, failing to provide loan payoff statements upon request within a reasonable time, or failing to deliver a fee schedule to a consumer upon request.
B. Proposals to Improve Mortgage Advertising
The Board is proposing to require that advertisements for both open-end and closed-end mortgage loans provide accurate and balanced information in a clear and conspicuous manner about rates, monthly payments, and other loan features.
The Board is also proposing to prohibit the following seven deceptive or misleading practices in advertisements for closed-end mortgage loans:
(i) Advertising “fixed” rates or payments for loans whose rates or payments can vary without adequately disclosing that the interest rate or payment amounts are “fixed” only for a limited period of time, rather than for the full term of the loan;
(ii) Comparing an actual or hypothetical consumer’s current rate or payment obligations and the rates or payments that would apply if the consumer obtains the advertised product unless the advertisement states the rates or payments that will apply over the full term of the loan;
(iii) Advertisements that characterize the products offered as “government loan programs,” “government-supported loans,” or otherwise endorsed or sponsored by a federal or state government entity even though the advertised products are not government-supported or -sponsored loans;
(iv) Advertisements, such as solicitation letters, that display the name of the consumer’s current mortgage lender, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consumer’s current lender;
(v) Advertising claims of debt elimination if the product advertised would merely replace one debt obligation with another;
(vi) Advertisements that create a false impression that the mortgage broker or lender has a fiduciary relationship with the consumer; and
(vii) Foreign-language advertisements in which certain information, such as a low introductory “teaser” rate, is provided in a foreign language, while required disclosures are provided only in English.
C. Proposal to Give Consumers Disclosures Early
The Board is proposing to require creditors to provide transaction-specific mortgage loan disclosures such as the APR and payment schedule for all home-secured, closed-end loans no later than three days after application and before the consumer pays any fee except a reasonable fee for the originator’s review of the consumer’s credit history.
Comments on the Fed’s proposal must be received on or before 90 days following the proposed rule’s publication in the Federal Register, which is expected shortly. Comments should be submitted, identified by Docket No. R-1305, by following the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/proposedregs.cfm.
We will keep you apprised of developments with respect to the passage and the legal and practical implications of the proposed rules as they evolve.
If you have any questions about the information in this e-Alert, please contact Josh Davin Morton at 713.752.4539 or jmorton@jw.com.
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