My Take on the Fed’s Proposal to Amend Reg Z

You can read the official press release here.   This following is from the highlights.  I’ve added my opinions (if any) in italic.

The proposal would establish a new category of “higher-priced mortgages” that should include virtually all subprime loans. 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.  Fine.
• Prohibit a lender from making a loan by relying on income or assets that it does not verify.   Fine. I have never been a fan of "over" stated income when the income is not there.  I have done just a few stated income loans in my mortgage career where the income was there, but hard to document.  This will impact those borrowers.
• 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.   Fine.  I’ve never liked prepayment penalties.  Life happens and sometimes people don’t stay in a home or mortgage as long as they originally intended.
• Require that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance.  Fine.  The lender may only offer the borrower the opportunity to opt out of the escrow account after one year. All subprime (or non-prime, same thing–just sounds better these days) should have reserve accounts. 

The proposal would, for these and most other mortgages (prime aka a-paper):

• 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.    Fine…IF…the borrower accepts and understands that the broker is going to be compensated a total of x% which includes YSP plus the origination if any.  For example, the broker would disclose upfront to the borrower that he/she is going to make 1.25% (just for example sake) to the borrower.  If the borrower is paying 1% if origination points and the lender is paying 0.30% in YSP; the loan originator will credit the borrower 0.05% of the YSP to the consumer.   However, if the reverse happens, and the YSP winds up being 0.20%, shouldn’t the Loan Originator be allowed to increase their origination by 0.05% to meet the 1.25% agreed compensation?  It needs to work both ways. 
• 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.  This must be on the servicing side (and it’s fine with me).
• Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.  Fine…absolutely fine!
• 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.   Fine.  I have called 5 year ARMs, ARMs that are fixed for five years and adjust annually afterward.  I don’t see that as misleading.  Consumers should know what the "worse case" payment may be on their ARM or any mortgage.
• 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.  Fine.  I do not provide rate quotes (except for those I post on Fridays with all of my disclaimers) without sending a Good Faith Estimate with the Federal Truth in Lending. 

I am not seeing a huge issue with the Fed’s proposal.  In fact, as you can see, for the most part, I agree with it…it’s fine! 

NOTE:  If you bought a home using over-stated income and have an ARM adjusting, you may need to find a co-signer to help you obtain your next mortgage.  There will not be many (if any) stated or no-income verified products available for you.  This is your government in action.