Wednesday, January 9

Proposed Changes to Truth In Lending

The Federal Reserve has put out for comment proposed changes to Regulation Z- Truth In Lending. These changes, if adopted and made into law, will have an effect on the mortgage loan industry, and as you have probably read or heard by now, make qualifying for a mortgage much more difficult.

Is this additional regulation good for the consumer? Is it good for the industry?

From a consumer perspective, it will afford yet another opportunity for you to sign and read something; more disclosures for you. I've been lending money for a long time and virtually NOBODY reads these things unless the banker takes the time to go over the documents together with the applicant. Now, most applications are originated through the mail and online, diminishing the opportunity to go over the documents with the applicant.

From an industry perspective, it appears that this might be a bad thing. Anytime an already heavily regulated industry is burdened with more regulation, it impedes business. Moreover, in this particular case, it may very well put some people right out of business.

Not only have I given mortgage to a lender as security for a loan on some real estate that I own, and I am a lender who takes mortgages from others as security for real estate loans. Although far from unique, my perspective is from both sides of the desk.

As a consumer, I'm not sure that I will be effected much, nor will I feel more informed. Just more paper that I need to affix my initials and signature to. Sure, I might be REQUIRED to provide evidence of my income and assets because the regulation mandates it, but I kind of expected to do that anyway.

From a lenders perspective, I think that the regulation will have a broad and adverse impact on the industry. Our government would like to mandate sound underwriting policies and requirements, requiring that the lender verify income and assets, and the borrowers ability to repay the loan. This makes me wonder what the government thinks we bankers are doing? Is this to suggest that we just willy nilly give out loans to people without first making a determination as to whether or not they qualify or if they can repay the loan? Why would anyone do that anyway? I can see increasing regulatory requirements for those involved on the business side who have nothing to lose if the deal goes bad, but for those that have real money at stake on the business side; they don't want to lose their money anymore than the next guy does!

So much of what happened with this sub-prime mortgage disaster is credit score, LTV, and MORTGAGE BROKER driven. Not to vilify the Brokers out there, most are professionals, but there are some that will tell you only what they want you to know, and only what you want to hear, just to get a juicy commission check at the end of the month. In my opinion, the subprime mortgage loan problems could be almost entirely resolved by simply prohibiting mortgage brokers access to these types of loan products.

Those that received the 'Liar Loans' or NINA's (no income, no asset verification) or stated income loans, had to have had very good credit history's in order to qualify. Many of these homes that are foreclosing are NON OWNER OCCUPIED investment properties. The owners financed them with little money down, expecting that the real estate market would continue to climb, and that they could cash out on the equity in a short time. No principle investment, pay interest for a few years on the amount borrower, then sell the property at a high profit because the market value has risen so much.

For example, an investor buys a $100,000 property, no money down and takes an interest only loan to finance it. This invest er is gambling that in a relatively short time frame, the property will be worth $160,000, and that they will sell and profit on the new equity. What happened is that instead of increasing in value, the property decreased in value, and the investor is walking away without losing any real money...

Anyway, here is what the Fed is proposing to do with Regulation Z:

Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z

The proposal would establish a new category of “higher-priced mortgages” that should include virtually all subprime loans.1 The proposal would, for these loans:

-Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.

-Prohibit a lender from making a loan by relying on income or assets that it does not verify.

-Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

-Require that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

-Prohibit lenders from paying mortgage brokers “yield spread premiums” that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

-Prohibit certain servicing practices, such as failing to credit a payment to a consumer’s account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and “pyramiding” late fees.

-Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

-Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term “fixed” to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or “teaser” rates.

-Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.



1. Higher-priced mortgages would be those whose annual percentage rate (APR) exceeds the yield on Treasury securities of comparable maturity by at least three percentage points for first-lien loans, or five percentage points for subordinate-lien loans. Return to text