Federal Reserve Proposes Regulation Z Amendments

The Federal Reserve Board has proposed and asked for public comment on potential changes to Regulation Z (Truth in Lending) – designed to protect consumers from unfair or deceptive home mortgage lending and advertising practices.

The rule, which would be adopted under the Home Ownership and Equity Protection Act (HOEPA), would restrict certain practices and would also require certain mortgage disclosures to be provided earlier in the transaction.

According to the Fed, the proposal includes four key protections for ‘higher-priced mortgage loans’ secured by a consumer's principal dwelling:

  • 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.

The rule would define higher-priced mortgage loans to capture loans in the subprime market – but generally exclude loans in the prime market. A loan would be covered if it is a first-lien mortgage and has an annual percentage rate (APR) that is three percentage points or more above the yield on comparable Treasury notes, or if it is a subordinate-lien mortgage with an APR exceeding the comparable Treasury rate by five points or more.

Numerous additional protections would apply to all loans secured by a consumer's principal dwelling, regardless of the loan's APR, the Fed adds. Advertising rules and good-faith estimate requirements would also be instituted.


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