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Banking

Federal Reserve Board Issues Mortgage Rules

The Federal Reserve Board unveiled a number of final rules on August 16 aimed at protecting consumers from unfair or abusive lending practices. The Board also proposed new mortgage lending rules dealing with enhanced consumer protections, disclosures, and revisions to the escrow rules for jumbo mortgage loans.

photo of realtor and couple next to for sale sign

New rules protect consumers, require better disclosures
Among other measures, the Fed issued a final rule banning yield spread premium payments, which occur when a consumer accepts a higher interest rate than that required by the lender. The rule, effective April 1, 2011, also prohibits originators from:

  • receiving compensation based on interest rates or other loan terms (originators may still receive compensation based on the loan amount)
  • steering consumers into mortgage loans that are not in their best interest in order to increase the originator's compensation
  • receiving compensation from lenders and other parties when they are also being paid by the borrower

The Board unveiled another set of rules the same day requiring that consumers be notified when their mortgage loan has been sold or transferred. Under the rules, the company acquiring the loan would be responsible for sending a notice within 30 days of the transfer. The final rules, which implement an amendment to the Truth in Lending Act, go into effect Jan. 1, 2011.

Board proposes new rules for reverse mortgages, jumbo loans
The Federal Reserve Board also issued two proposals in August. One would enhance mortgage loan disclosures, and the other would raise the escrow account threshold for jumbo mortgage loans.

Under the first proposal, lenders would be required to explain clearly the features and risks associated with reverse mortgages. In addition, lenders would be prohibited from conditioning a reverse mortgage on the purchase of other financial products such as annuities or long-term care insurance.

The proposal would also enhance consumer protections for all mortgages by ensuring that people have ample time to review loan cost disclosures before they are obligated to pay any fees in addition to requiring that loan servicers provide information about the ownership of a loan within a reasonable time period of when such information is requested.

The second proposed rule, which implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would raise the escrow requirement threshold for first-lien jumbo loans, currently set at 1.5 percentage points above the applicable prime offer rate. Jumbo loans are those that exceed the size limit for purchase by Freddie Mac. Under the proposed rule, the annual percentage rate threshold for such loans would be raised to 2.5 percentage points above the applicable prime offer rate.

Both proposals have a 90-day comment period.

August 31, 2010