Major Reg Z Changes

Date: 10/01/09

Appraisals, HOEPA, Servicing, and Advertising Affected;
New Category of Loans Created

Major changes to the Home Ownership and Equity Protection Act (HOEPA) go into effect October 1, 2009. These changes affect appraisals, HOEPA loans, servicing, and advertising and create a new category of loans called Higher Priced Mortgage Loans (HPMLs), a category that will occupy the space between prime loans and HOEPA loans.

The law's implementing regulation (which we know as "Reg. Z") has, since 1994, mandated disclosure requirements for high-cost closed-end mortgage loans, known as HOEPA - or Section 32 - loans. Now we have a new kind of loan called a higher-priced closed-end mortgage loan (HPML) - or - Section 35.

HOEPA loans are defined by the Federal Reserve Board – the agency that writes Regulation Z – as loans on which the APR exceeds the yield on a Treasury security of a comparable maturity by eight percentage points, or a loan on which total points and fees exceed eight percent of the loan amount. HOEPA loans aren't prohibited – they're just heavily regulated and subject to special disclosures and practices. The restrictions on these kinds of high-cost loans nearly eliminate them from the market. Many lenders note prominently on their rate sheets that they do not offer Section 32 loans.

HPMLs aren't quite HOEPA loans, but they're not prime loans either. An HPML is a first-lien loan that is 1.5 percentage points above the average prime offer rate (APOR) as computed from the Freddie Mac Primary Mortgage Market Survey (PMMS). For second-lien loans, the trigger is 3.5 percentage points above the APOR. Construction, bridge, reverses and HELOCs are excluded from the HPML restrictions. As of April 1, 2010, HPMLs must have an escrow account for taxes and insurance (October 1, 2010 for manufactured homes).

The Federal Reserve says the HPML category includes "virtually all closed-end subprime loans secured by a consumer's principal dwelling," and:

• Prohibits a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate it as part of a "pattern or practice."
• Prohibits a lender from relying on income or assets that it does not verify to determine repayment ability. It is not acceptable to rely only on a statement from the consumer.
• Bans any prepayment penalty if the payment can change during the initial four years.
• Requires that the lender establish an escrow account for the payment of property taxes and homeowners' insurance for first-lien loans. (The lender may offer the borrower the opportunity to cancel the escrow account after one year.)

Some lenders express concern that FHA and jumbo loans may end up in this new category.

In addition to creating the HPML category, the new Reg Z rules also impose two new prohibitions regarding appraisals, make two revisions to the HOEPA rules, and add three prohibitions regarding servicing and seven prohibitions regarding advertising. These revisions and prohibitions apply to all loans except HELOCs.

Appraisals

A creditor or mortgage broker cannot directly or indirectly coerce, influence or encourage an appraiser to misrepresent the value of a primary residence and a creditor can't close on a loan based on an appraisal if it knows of a violation of the non-coercion or non-influence prohibitions.

HOEPA

Many lenders don't write HOEPA loans, but, for those who do, as of October 1, 2009, a lender cannot make a HOEPA loan without regard to a consumer's ability to repay the loan. How do you verify ability to repay? Easy: verify income, assets and obligations. As well, the maximum prepayment penalty is reduced from five years to two and the principal and interest payment cannot change in the first four years of the loan.

Servicing

Servicers must credit a payment as of the day it was received, cannot charge a late fee on a late fee (a practice called "pyramiding"), and must provide a payoff statement within five business days.

Advertising

For both open-end and closed-end loans secured by any dwelling, advertising cannot give "undue emphasis to low promotional or teaser rates and payments," and must include information about rates, monthly payments and other loan features. Other advertising-related prohibitions include making misleading representations about government endorsement, using the name of the consumer's current lender, making claims of debt elimination, using the term "counselor," and representing a rate or payment is fixed when it can change.

These changes move the Truth-in-Lending Act from a mere disclosure statute to a statute restricting certain practices and broadens its definitions of what is unfair, abusive, deceptive and intentionally misleading or evasive. This is a fundamental shift. Whether due to political pressure or in reaction to the turmoil in the mortgage market, the Federal Reserve Board decided that simply disclosing a practice is no longer sufficient; if the Fed does not believe the practice is in the best interest of the borrower, the Fed will seek to prohibit that practice. Long accused of standing by, and not using the powers granted it by Congress, while practices inimical to consumers were employed by the mortgage industry, the Fed, now threatened by Congress with the loss of its powers and much of its turf, is trying to show that there's a new sheriff in town, willing to un-holster its weapons and fire.

Compliance Team
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