Board of Governors of the Federal Reserve System

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.

Footnotes

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