New rules targeted primarily at mortgage lenders making higher-cost loans take effect Thursday, more than a year after they were finalized by the Federal Reserve.

Many lenders have already adopted some of the changes in their own best interest, such as verifying borrowers’ income and assets and assessing their ability to repay a loan after it resets to a higher interest rate.

Other provisions, such as a ban on prepayment penalties and the mandatory creation of escrow accounts for the payment of property taxes and homeowners’ insurance, were opposed by the lending industry (see story).

The escrow requirement goes into effect on Oct. 1 for manufactured homes, along with most of the other changes to the home mortgage provisions of Regulation Z, the language implementing the Truth in Lending Act.

But lenders making high-cost loans backed by site-built homes won’t be required to establish escrow accounts until April 1, 2010.

Those and most other significant Regulation Z rule changes apply only to "higher-cost" mortgage loans, as defined by a formula the Fed said is intended to capture "virtually all" subprime loans while excluding prime loans.

First-lien loans will be considered higher cost if they have an annual percentage rate that’s 1.5 percentage points or more above an "average prime offer rate" index based on a rate survey published by Freddie Mac. Second loans, also known as piggybacks, will be considered high cost if they are 3.5 percentage points or more above the index.

Some of the Fed’s proposed rule changes, such as prohibitions on coercing appraisers, will apply to all mortgages. Lenders will also be required to provide additional information about rates, monthly payments, and other loan features in their advertising for all loans.

Since July 30, lenders have been required under TILA to provide good faith estimates within three business days of receiving a loan application, and to wait seven business days after providing a good faith estimate before closing a loan.

In the future, the Fed proposes to use its authority under TILA to ban yield-spread premiums, incentive payments to mortgage originators based on a loan’s interest rate or other terms. The Fed also plans to revise loan disclosures to reveal the cost of settlement services such as title insurance (see story).

A new standardized loan disclosure form the U.S. Department of Housing and Urban Development will require lenders to begin using Jan. 1 under the Real Estate Settlement Procedures Act (RESPA) requires that yield-spread premiums be credited against a borrower’s closing costs.

The lending and real estate industries have called on the Fed and HUD to develop a single loan-disclosure form that meets both RESPA and TILA requirements.

The Obama administration has proposed creating a Consumer Financial Protection Agency that would be required to develop a uniform mortgage disclosure form and put it forward for public comment within a year of the agency’s creation (see story).


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