Under new rules announced today, subprime lending has been dramatically altered. On high-cost loans -- stated-income loans are prohibited, escrow accounts are mandatory and prepayment penalties are limited.
Regulation Z has been amended to reduce deceptive lending, the Federal Reserve Board announced today. The final rule impacts loans that fall under the Home Ownership and Equity Protection Act.
The new rules are an apparent response to public criticism that federal regulators did too little to prevent the mortgage crisis.
HOEPA loans now include first-lien mortgages on owner-occupied properties that are at least 150 basis points over Freddie Mac's "average prime offer rate." The fed said it will begin publishing the average. Second liens will be considered high-cost if they are 350 BPS higher than the average.
Under the new rules, lenders are prohibited from making high-priced loans without regard to the borrower's ability to repay the loan. In addition, lenders must consider the maximum payment during the first seven years when qualifying a borrower.
Another requirement on HOEPA mortgages is the mandatory verification of income, the fed said.
On high-cost loans where the payment can adjust during the first four years, prepayment penalties are prohibited. On all high-cost loans, prepayment penalties are limited to two years.
A fourth category requires mandatory escrow accounts for taxes and insurance on all HOEPA first mortgages.
Provisions for yield-spread premiums have been dropped for now, the announcement said.
The new HOEPA rules apply both to federally regulated and unsupervised mortgage lenders, according to the statement.
The Fed also announced new rules that apply to all owner-occupied mortgages, whether or not they are high-cost. One of those rules is the prohibition of appraiser coercion. Another requires that good-faith estimates be provided for all loans, including home-improvement loans and refinances. In addition, the only fee that a can be charged prior to a GFE is a reasonable credit report fee.
Advertising that presents a loan program as "fixed" even though the rate or payment can change is no longer allowed on any type of loan under the new rules.
Servicers on all loans are banned from pyramiding late fees, crediting payments after the date of receipt and taking an unreasonable amount of time to provide payoff statements.
"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," Federal Reserve Chairman Ben S. Bernanke said in the statement. "Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers."
The mandatory escrow requirement becomes effective in 2010, which should give servicers enough time to establish new systems. The rest of the new rules are effective Oct. 1, 2009.