Financial Update (Fourth Quarter 2007)

Fed Proposes New Rules on Unfair Lending

couple and realtor at home saleThe Federal Reserve Board is asking for public comment on proposed provisions aimed at protecting consumers from unfair or deceptive home mortgage lending and advertising practices.

Proposed changes would be adopted under the Home Ownership and Equity Protection Act (HOEPA). The measures would restrict certain practices and would also require certain disclosures to be given to mortgage borrowers earlier in the process.

Under HOEPA, the Federal Reserve has the responsibility to prohibit acts and practices it finds to be unfair or deceptive regarding mortgage loans.

Knowledgeable decision making is among proposals' objectives
"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," said Federal Reserve Chairman Ben Bernanke. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated."

Press release off-site image
Highlights of proposed rules off-site image
Information about how to comment on proposed rules off-site image

The proposal includes four key protections for higher-priced mortgage loans—which primarily would include loans in the subprime market—secured by a consumer's primary home:

  • Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers' ability to repay the loan;
  • Creditors would be required to verify the income and assets they rely upon in making a loan;
  • Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least 60 days before any possible payment increase; and
  • Creditors would have to establish escrow accounts for taxes and insurance.

A loan would be covered under the proposed provisions if it is a first-lien mortgage and has an annual percentage rate 3 percentage points or more above the yield on comparable Treasury notes or if it is a subordinate-lien mortgage with an annual percentage rate (APR) exceeding the comparable Treasury rate by 5 percentage points or more.

Additional consumer protections proposed
The following protections would apply to all loans secured by a consumer's principal dwelling, regardless of the loan's APR:

  • Lenders would be prohibited from compensating mortgage brokers by making payments known as "yield-spread premiums" unless the broker previously entered into a written agreement with the consumer disclosing the broker's total compensation and other facts. (A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.) The consumer's written agreement with the broker must occur before the consumer applies for the loan or pays any fees;
  • Creditors and mortgage brokers would not be permitted to coerce a real estate appraiser to misstate a home's value; and
  • Companies that service mortgage loans would be prohibited from engaging in certain practices. For example, servicers would be required to credit consumers' loan payments on the day they receive it and would have to provide a schedule of fees to a consumer upon request.

"Unfair and deceptive practices have harmed consumers and the integrity of the home mortgage market," said Federal Reserve Board Gov. Randall S. Kroszner. "We have listened closely and developed a response to abuses that we believe will facilitate responsible lending."

December 21, 2007