Jaworski and Mishkin on the Feds Final Rule Amending Regulation Z

Jaworski and Mishkin on the Feds Final Rule Amending Regulation Z

 

On July 30, 2008, the Fed adopted the final rule to amend Regulation Z. Effective October 1, 2009, the rule creates a new category of mortgage loans, imposes new requirements on the making and servicing of closed-end mortgages secured by a primary dwelling, and imposes new requirements for advertising mortgage loans. In this commentary, Robert Jaworski and Barbara Mishkin of Reed Smith LLP answer the most important questions concerning the rule. They write:
 
     With respect to higher-priced mortgage loans, the final rule (i) requires lenders to take into account the borrower's ability to repay the loan from income and assets other than the collateral and to verify the income and assets on which the borrower is relying to repay the loan (in effect, prohibiting stated income higher-priced mortgage loans); (ii) severely restricts the ability of lenders to charge prepayment penalties; (iii) requires loan servicers to escrow for taxes and insurance premiums during at least the first year of the loan term on a first-lien loan; and (iv) prohibits structuring a loan as an open-end loan to avoid these new requirements. These same protections also apply to most high cost mortgage loans covered by HOEPA [Home Ownership and Equity Protection Act] (HOEPA Loans).
 
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     The Board had proposed (i) to require mortgage brokers to disclose to all applicants for a closed-end loan to be secured by their principal dwelling, at time of application, the total amount of compensation the broker will receive in the transaction, both from the borrower and the lender; and (ii) to prohibit a creditor from paying a mortgage broker any compensation that would cause the mortgage broker's total compensation to exceed the amount so disclosed. However, in the face of intense industry opposition, the Board omitted this portion of its proposal from the final rule, while indicating that it would continue to examine options for addressing potential unfairness to consumers associated with broker compensation arrangements such as yield spread premiums and would continue to consider possible disclosure or other remedies to such potential unfairness in connection in its ongoing comprehensive review of Regulation Z.
 
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     With respect to advertisements for closed-end home-secured credit, the final rule requires that all mandated disclosures be clear and conspicuous. If such an advertisement includes the amount of any payment or a simple annual interest rate when more than one simple annual interest rate will apply during the loan term, additional information concerning the advertised payment amount or the rate must be disclosed, and it must be disclosed with equal prominence and in close proximity to the advertised payment amount or rate. Commentary amendments in the final rule provide that this additional information will be deemed to satisfy the equal prominence and close proximity requirement if it is in the same type size and immediately adjacent to or directly above or directly below the promotional rates or payments, without any intervening text or graphical displays. In addition, the final rule only permits the advertisement of a simple annual interest rate in conjunction with the APR for closed-end home-secured loans.

 

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    The final rule provides that a higher-priced mortgage loan that includes a prepayment penalty that does not conform to the requirements set forth in the final rule is rescindable for up to three years from date of closing (unless it is a loan to which the right of rescission does not apply; e.g., a purchase money loan). Also, since the new restrictions on both higher-priced mortgage loans and closed-end loans secured by the borrower's principal dwelling (except for the requirement to provide the early-TIL) are based on the Board's authority under HOEPA, it appears that consumers who sue for violations of those restrictions will be entitled to collect the enhanced statutory damages that are currently available for violations of the existing requirements applicable to HOEPA Loans.
 

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