Consumer Compliance Outlook: Third Quarter 2010

Compliance Alert

Rulemakings Affecting Residential Mortgage Loans

On August 16, 2010, the Board of Governors of the Federal Reserve System (Board) announced five rulemakings (proposed, interim, and final rules) affecting residential mortgage loans. The rulemakings are summarized below.

Board proposes enhanced consumer protections and disclosures for home mortgage transactions, including reverse mortgages.

The proposal would:

  • Improve the disclosures consumers receive for reverse mortgages and impose rules for reverse mortgage advertising to ensure that advertisements contain accurate and balanced information;
  • Prohibit creditors from conditioning a reverse mortgage on the consumer’s purchase of another financial or insurance product;
  • Require a consumer to receive counseling about reverse mortgages before a creditor can impose nonrefundable fees for a reverse mortgage or close the loan;
  • Improve the disclosures that explain a consumer’s right to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right;
  • Ensure that consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan;
  • Ensure that for all mortgage loans, consumers have time to review their loan cost disclosures before they become obligated for fees, by requiring lenders to refund the fees if the consumer decides to withdraw the application within three days after they receive the disclosures; and
  • Clarify that when a consumer requests information from his or her loan servicer about the owner of the loan, the servicer must provide the information within a reasonable time, which generally would be 10 business days.

Comments are due by December 23, 2010. The Board’s announcement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100816e.htm External Link.

Board announces final rule to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.

The final rule applies to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. Under the final rule, which is effective April 1, 2011, a loan originator may not receive compensation based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points. Loan originators can continue to receive compensation that is based on a percentage of the loan amount. The final rule also prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. Additionally, the final rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The Board’s announcement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100816d.htm External Link.

Board announces final rule regarding consumer notification of mortgage loan sales or transfers.

The Board announced a final rule to implement a statutory amendment to the Truth in Lending Act requiring that consumers receive notice when their mortgage loan has been sold or transferred. The new disclosure requirement became effective in May 2009, upon enactment of the Helping Families Save Their Homes Act. Under the act, a purchaser or assignee that acquires a mortgage loan must provide the required disclosures in writing within 30 days. The Board published interim rules in November 2009 that were effective immediately. To allow covered parties time to make any necessary operational changes, they may continue to follow the November 2009 interim rules until the mandatory compliance date for the final rules, which is January 1, 2011. The Board’s announcement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100816c.htm External Link.

Board issues interim rule revising disclosure requirements for closed-end mortgages.

The interim rule under Regulation Z implements provisions of the Mortgage Disclosure Improvement Act (MDIA) that require lenders to disclose how borrowers’ regular mortgage payments can change over time. The MDIA, which amended the Truth in Lending Act, seeks to ensure that mortgage borrowers are alerted to the risks of payment increases before they take out mortgage loans with variable rates or payments. Accordingly, under the interim rule, lenders’ cost disclosures must include a payment summary in the form of a table, stating the following:

  • The initial interest rate together with the corresponding monthly payment;
  • For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a “worst case” example showing the maximum rate and payment possible over the life of the loan; and
  • The fact that consumers might not be able to avoid increased payments by refinancing their loans.

The interim rule also requires lenders to disclose certain features, such as balloon payments, or options to make only minimum payments that will cause loan amounts to increase. All of the disclosures required in the interim rule were developed through several rounds of qualitative consumer testing, including one-on-one interviews with consumers around the country.

Lenders must comply with the interim rule for applications they receive on or after January 30, 2011. Lenders have the option, however, of providing disclosures that comply with the interim rule before that date. The Board is also soliciting comment on the interim rule. Comments are due by November 23, 2010. The Board’s announcement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100816b.htm External Link.

Board proposes to revise escrow account requirements for jumbo mortgages.

The proposed rule, which implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would increase the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans. Jumbo loans are loans exceeding the conforming loan-size limit for purchase by Freddie Mac. In July 2008, the Board issued final rules requiring creditors to establish escrow accounts for first-lien loans if a loan’s APR is 1.5 percentage points or more above the applicable prime offer rate. Under the Dodd-Frank Act, which amended the Truth in Lending Act, the escrow requirement will apply to jumbo loans only if the loan’s APR is 2.5 percentage points or more above the applicable prime offer rate. The APR threshold for nonjumbo loans remains unchanged. This proposal would implement only the Dodd-Frank Act’s change to the APR threshold. Other provisions of the Dodd-Frank Act concerning escrow accounts will be implemented in a separate rulemaking. The proposed change would not affect the APR threshold used to determine whether a jumbo loan is subject to the other consumer protections that the Board adopted for higher-priced loans in 2008. The Board is soliciting comment on the proposed rule, including the appropriate implementation date. Comments are due by October 25, 2010. The Board’s announcement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100816a.htm External Link.