New Proposed Rules for Regulation Z - Truth in Lending

By
Industry Observer with MortgageBrokerPros.com

Once again the federal government is trying to step in and make new rules to regulations that, for the most part, are already in place. However, should these rules actually becoming part of the current regulations, the mortgage broker industry as well as the real estate industry will be further weakened.

Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z

The proposal would establish a new category of "higher-priced mortgages" that should include virtually all subprime loans.  The proposal would, for these loans:

  • Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.
  • Prohibit a lender from making a loan by relying on income or assets that it does not verify.
  • Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.
  • Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance.  The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

  • Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance 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, and "pyramiding" late fees.
  • 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; for example, 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 advertised introductory or "teaser" rates.
  • Require truth-in-lending disclosures to borrowers 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.

Doesn't seem to bad if you quickly review the above information, but I take exception to the following.

  • Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

How could this possible be a bad thing? Well no where in the proposal does it state the length of time a lender must consider a borrowers ability to repay the loan. Is it 1 year, 2 years, 3 years, 25 years? The proposal also states that a borrowers ability to repay does not have to be entirely based on the borrowers income. So for example, a college graduate who has been working for two years in his or her field of study can be found to reasonably obtain a raise in the future so that can be taken into consideration as future ability to repay.

A borrower with a 75% debt to income ratio can be approved if that person has enough assets to substantiate repayment of the loan for a yet to be determined length of time. If a lender is required to substantiate the borrowers ability to repay the loan for say 5 years, this person can have enough liquid reserves to pay the loan back for the next 10 years. Should this person actually be able to obtain a loan even though 75% of his or her pre-taxed income is being used to pay the mortgage.

Lastly, other housing expenses in addition to the mortgage payment, taxes and insurance are to be taken into consideration when the lender is making their detrmination on the borrowers ability to repay the loan. Now what exactly would those other expenses be? Do we have to look at the average cost of electricity, obtain documentation from the borrower with regard to their average monthly expenditures on groceries, and find out the average monthly cost to heat the home? 

  •  Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance.  The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

I've never been a fan of the escrow account and normally advise my clients not to escrow for taxes and insurance. I'm sure everyone reading this has probably had a bad experience with their own lender or had a friend whose mortgage lender dropped the ball when paying an insurance premium or property tax payment. In addition, requiring escrows at the time of closing increases the settlement fees at the time of closing. This is not a big deal in some areas but a major deal for places like New York City where property taxes in some counties are $8,000 - $12,000 per year. If the lender requires 3 months of reserves for property taxes and 3 months of homeowners insurance be taken in advance at the time of closing, a person in New York or other "high cost" area will have to spend anywhere between $3,000 to $7,000 more for settlement fees. This is not in the best interest of the consumer but in the best interest of the mortgage lender.

  • Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

Left out of this bullet point is the sentence contained in the actual proposal that states that the agreement on compensation must happen prior to the application. How exactly can I come to an agreement on my compensation with a client prior to taking an application? My clients know exactly how I get paid and what they are paying for m service. To come to an agreement on compensation prior to even knowing how much work will be involved or even if an application can be approved is just absurd. Notice that this proposed rule does not include mortgage originators who work for lenders. Mortgage brokers will be required to negotiate their fee prior to the application but a mortgage originator working for a lender can still earn an override in the form of SRP or service release premium. How long will it be before mortgage brokers start advertising "I'll write you loan for only $99.95."?

  • Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

Did I miss something or is there not a new law going into effect on Janaury 1, 2009 that states that mortgage brokers and mortgage lenders cannot order an appraisal directly from the appraiser. If we are forbidden from having contact with the appraiser, how exactly would a creditor or broker coerce or encourage an appraiser to "hit a number"?

  • Require truth-in-lending disclosures to borrowers 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.

Truth in lending disclsoures are currently required to be provided to an applicant within three days of the date of application. Taking a fee prior to disclosing is just bad business although there are people who do it.

Of course, this is a bit of a rant posting but there are pages upon pages contained in the 298 page proposal that are quite disturbing. Should these proposed rules become part of the regulation it will not help as much as compund the problem the mortgage and housing industries are now facing.

Once again it appears that the federal government is masking an attempt to "protect" consumers as much as it is attempting to further regulate mortgage brokers in an ultimate attempt to destroy the mortgage brokerage industry. 

To view the proposal you can visit http://www.federalreserve.gov/boarddocs/meetings/2007/20071218/reg%20z%20draft%20federal%20register%2012-18-07.pdf

 

Comments (2)

Christine Thierry
CrossCountry Mortgage - Sagaponack, NY
CRMS

5 stars!  You made the Mortgage Pro Week in Review!

Mar 31, 2008 05:00 AM
Eleanor Thorne
Equity Resources - Cary, NC
Equity Resources 919-649-5058

Anthony!  I wrote a CALL TO ACTION post about this as well - GOOD INFORMATION  To take action here's some info from the NC Association:


THE FED RULE LETTERS NEED TO BE MAILED AT ONCE!
 
The cut off for comments is 4/8/2008.  Be proactive!!  This is the time to take charge of your business!

 
Letters need to be mailed to:
Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
 
You may also submit comments, identified by Docket No. R-1305, by any of the following methods:
 
4 Agency Web site:  http://www.federalreserve.gov/  Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm
 
4 Federal eRulemaking Portal:  http://www.regulations.gov/search/index.jsp  Follow the instructions for submitting comments.
 
4 E-mail:  regs.comments@federalreserve.gov.  Include the docket number R-1305 in the subject line of the message.
 
4 Fax: (202) 452�3819 or (202) 452�3102.

Apr 01, 2008 03:17 AM