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Fed Proposes Sweeping Changes

YSPs, ARMs HELOCs impacted

July 23, 2009

By staff

In its attempt to clean up the mortgage business, the Federal Reserve Board has proposed sweeping disclosure changes -- including a new one-page form at application, final Truth in Lending Act disclosures three days before closing and special new notices required after the closing on adjustable-rate loans. The fed is also proposing restrictions on lenders that provide home-equity lines-of-credit and calling for a ban on yield spread premiums paid to mortgage brokers and originators who upsell interest rates.

Significant changes were proposed to Regulation Z disclosures under the Truth in Lending Act, a press release today said.

On closed-end mortgages, the central bank wants to improve annual percentage rate disclosures by including a comparison with average prime APRs, factoring other settlement costs into the APR and providing information about how high adjustable-rate mortgage payments might climb. A new one-page disclosure provided at application would review key issues to consider.

The fed is calling for a requirement that lenders advise ARM borrowers at least 60 days ahead of payment adjustments -- up from a 25 days currently. It is also urging the use of special monthly disclosures for negative amortization loans.

Disclosures sent out within three days of the application would be streamlined by highlighting risky loan features, the fed said. The fed is also recommending the final TILA disclosures be provided a minimum of three days before the loan closing.

The fed said it would attempt to work with the U.S. Department of Housing and Urban Development to make TILA disclosures complimentary with disclosures required under the Real Estate Settlement Procedures Act, "potentially developing a single disclosure form that creditors could use to satisfy both laws."

The Mortgage Bankers Association issued a statement indicating that it was pleased with the effort to coordinate TILA and RESPA disclosures.

"We strongly endorse the effort to create one set of forms that would satisfy both laws and better inform consumers," MBA said in a statement.

Also behind a consolidation of RESPA and TILA disclosures was the American Bankers Association, which said in its own statement that the two disclosures should be reconciled before any further disclosures are required.

In addition, the fed is proposing prohibiting payments to mortgage brokers and loan originators that are based on the interest rate. The proposal also seeks to prohibit brokers and loan officers from steering prospective borrowers to products that earn them more income but aren't necessarily in the best interests of the borrowers.

The National Association of Mortgage Brokers declined to immediately comment on the fed's proposal.

MBA said it will closely examine the YSP provisions.

Another fed proposal calls for HELOC lenders to provide a new one-page disclosure at application that summarizes basic information and risks on HELOCs. A subsequent disclosure shortly after application would reflect the specific terms of their proposed HELOC.

Once HELOCs are opened, the fed wants lenders to provide borrowers with the initial and final disclosure for comparison. Monthly statements would be enhanced with more details about finance charges.

Under the proposal, creditors would be prohibited from terminating a HELOC because of payment-related reasons unless the loan is more than 30 days past due. Any changes to HELOC terms would require 45 days advanced notice.

The proposal also provides additional restrictions tied to HELOC suspensions, credit-limit reductions and account reinstatements.

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