Fed Proposes Sweeping TIL Changes

The regulator Tuesday announced it is seeking public comment on proposed changes to the Home Ownership and Equity Protection Act. HOEPA, as it is known, is an amendment to Regulation Z, or the Truth In Lending Act.

Loans impacted by HOEPA are those where fees exceed the greater of $561 or 8 percent of the loan amount — though pending House legislation would lower the threshold to 5 percent. In addition, first liens where the spread between the loan’s annual percentage rate is at least three percentage points above the Treasury security of comparable maturity, and second-lien loans where the spread is at least five percentage points, also fall within HOEPA triggers.

“Certain practices have led too many people into homeownership that they cannot sustain,” Federal Reserve Governor Randall S. Kroszner said in a separate statement. “Our goal throughout this process has been simple to articulate but, frankly, challenging to perfectly achieve: We strive to protect borrowers from practices that are unfair or deceptive, but to do so without unintentionally causing responsible lending to shrink or unduly limiting consumer choice.”

Among changes proposed by the Fed is a prohibition of lending to borrowers without considering their ability to repay the loans. The agency is also proposing a ban on loans with no income or no asset verification.

Prepayment penalties would be prohibited within 60 days of any possible payment increase under the Fed’s plan, while escrow accounts would be mandated for taxes and insurance. But lenders could offer borrowers an opportunity to opt out of the escrow account after one year.

In addition, yield spread premiums to brokers would be prohibited under the proposed changes unless “the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts,” according to the announcement. The YSP restrictions would apply to all mortgages, even those that don’t fall within HOEPA parameters.

“We worry that replacing important lending flexibility with rigid formulas might … limit lending to some creditworthy borrowers,” Edward L. Yingling, president and chief executive officer of the American Bankers Association, said in a statement. “The abuses took place in practices more than in products. We worry that some of the product restrictions could make it harder for bankers to tailor products for their customers and communities and result in some creditworthy customers not being able to obtain a loan.”

Other, less potent, proposed changes for all loans include a prohibition on coercing real estate appraisers to boost fair market values, a ban on deceptive and misleading advertising such as promoting ARM loans as fixed rate, and prohibiting all fees except credit report charges before the originator provides a Good Faith Estimate — which would be required three days in advance on both purchase and refinance loans.

Servicers would be required to post loan payments on the date received, provide payoff statements within a reasonable period of time and avoid “pyramiding” late fees, the Fed said.

“As the mortgage market has become more segmented and as risk has become more dispersed, market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded,” Federal Reserve Chairman Ben Bernanke said in a separate statement. “Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy.”

“We have worked carefully to craft clear, bright-line rules with which market participants can reasonably comply, making it likely that responsible capital will again flow to traditionally underserved borrowers and communities,” Kroszner added. “These proposals alone will not end all of the problems in the mortgage market. Many market participants have been taking steps toward self-regulation and correction of some of the problems we have seen; we continue to encourage them to do so.”