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Fed Reserve proposes significant changes to provide more disclosure and protection to borrowers on mortgages

Dennis Norman

Dennis Norman

Late last week the Federal Reserve Board proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with home mortgages and home equity lines of credit.

These changes are just proposed at this point and are being offered for public comment for 120 days at which time the Fed Reserve will review comments and decide whether or not to put the changes into effect.

Ben S. Bernanke, Chairman of the Federal Reserve

Ben S. Bernanke

“Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,” said Federal Reserve Chairman Ben S. Bernanke. “It is often said that a home is a family’s most important asset, and it is the Federal Reserves’ responsibility to see that borrowers receive the information they need to protect that asset.”
The proposed changes include:

  • Disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. To address this, the proposal would:
    • Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;
    • Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit;
    • Require lenders to provide the final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and
    • Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.
  • To prevent mortgage loan originators from “steering” consumers to more expensive loans, the proposal would:
    • Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms; and
    • Prohibit a mortgage broker or loan officer from “steering” consumers to transactions that are not in their interest in order to increase the mortgage broker’s or loan officer’s compensation.
  • The rules for home-equity lines of credit would be revised to:
    • Prohibit creditors from terminating an account for payment-related reasons unless the consumer is more than 30 days late in making a payment
    • Provide additional protections related to account suspensions and credit-limit reductions, and reinstatement of accounts.

On the same day the Fed Reserve released information on these changes, Michael Calhoun, President of the Center for Responsible Lending, issued the following statement:

“Today the Federal Reserve Board issued proposed rules that hold great promise for eliminating abusive and unfair practices that have become commonplace int he mortgage industry. If fully implemented, these rules could remove perverse incentives that now encourage mortgage brokers and lenders to routinely overcharge on mortgages, particularly higher-cost mortgages.”

Mr. Calhoun went on to say “..brokers and loan officers could no longer get paid more for placing people in more expensive loans. Kickbacks-known as yield-spread premiums- would be completely banned. This measure would be significant in restoring fairness to home lending, particularly communities of color, where were targeted disproportionately for expensive, wealth-draining YSP’.”

If you would like to submit a comment on the proposed rule changes to the Federal Reserve click here to see the instructions on how to do so.

Below are additional links for more information:
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1 comment to Fed Reserve proposes significant changes to provide more disclosure and protection to borrowers on mortgages

  • Avatar Aaron Campbell

    I am one of the mortgage brokers who would be put out of business if this comes to pass. I pride myself in the work that I do and I firmly believe in providing exactly what you promise up front at closing. I have been in the business for 12 years and I have worked hard to build my business. I have been an owner of a mortgage company for the last 6 years. We are a small business but we have a very good reputation in our community. This legislation would end our ability to compete with banks. I am all for disclosure, we have nothing to hide. We make an honest compensation for the work we do. I have a wife and two kids that I am trying to provide for and this would be devastating. I am fine if you limit the ysp we can receive. Drop it to 2.5% across the board, don’t kill it all together. It is not good for consumers. If I am a loan officer at a bank, I receive compensation fromt he bank based on the interest rate that I quote. Why should their treatment be any different? A lot of the changes were needed and very much overdue. I never lived in the subprime world and I am happy for that. The mortgage brokers that are still around do things the right way or they would not still be in business. There is much more oversight from a state level at this point as well. I am guessing that there is a lot of pressure from big banks to put this in place. Please do what is best for the consumer and don’t eliminate ysp as a tool the mortgage broker can use to be competitive and put our clients in the best situation we can.