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Fed Issues New Mortgage Disclosure and Compensation Rules

Tue, Aug 17, 2010

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The U.S. Federal Reserve on Monday published a long list of new rules intended to protect consumers from what the central bank describes as “unfair, abusive, or deceptive lending practices.” The documents outline new requirements that will govern compensation to mortgage professionals and disclosures to borrowers regarding their home loans.

The Fed announced final rules prohibiting mortgage brokers and lenders’ mortgage loan officers from receiving compensation based on the interest rate or other loan terms – the practice commonly referred to as yield spread premiums, in which brokers and loan officers receive a bigger kick-back for steering borrowers to accept a higher interest rate than that required by the lender.

This controversial pay structure has been widely blamed for pushing unwitting consumers into high-cost, unsustainable mortgages.

“[The new rule] will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points,” the Fed said in a statement. “Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.”

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. It addition, it makes it illegal for loan originators to direct a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation.

These final rules on mortgage broker and loan officer compensation become effective April 1, 2011.

In addition, an interim rule has been published that revises the disclosure requirements for closed-end mortgage loans under Regulation Z-Truth in Lending Act

(TILA). Beginning January 30, 2011, lenders would be required to fully explain to borrowers any increases in their mortgage payments that might occur as a result of variable rates.

Lenders would have to provide borrowers with a payment table that includes 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. The new 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.

The Fed is soliciting comment on the interim TILA changes for 60 days, before considering the adoption of a permanent rule.

One TILA rule change that the Federal Reserve made final on Monday is that consumers must be notified in writing within 30 days if their mortgage loan is sold or transferred. The mandatory compliance date for this rule is January 1, 2011.

The regulator has also proposed another set of consumer protections related to TILA’s Reg Z. The latest proposal would mandate that for all mortgage loans, consumers have time to review their loan cost disclosures before they become obligated for fees, requiring lenders to refund the fees if the consumer decides to withdraw the application within three days of receiving the disclosures.

In addition, it would ensure consumers receive new disclosures when the parties agree to modify key terms of an existing closed-end mortgage loan, and when a consumer requests information from their loan servicer about the owner of the loan, the servicer must provide the information within 10 business days.

Concerning reverse mortgages, the new consumer protection proposal would improve the disclosures consumers receive, impose rules for reverse mortgage advertising, and prohibit creditors from conditioning a reverse mortgage on the consumer’s purchase of another product, such as annuities or long-term care insurance. It would also require that a consumer receive counseling about reverse mortgages before a creditor can impose nonrefundable fees or close the loan.

The Fed has also proposed a rule to revise the escrow account requirements for higher-priced, first-lien jumbo mortgages. The proposed rule implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and would increase the annual percentage rate (APR) threshold that mandates such accounts from the current limit of 1.5 percentage points to 2.5 percentage points.

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