The Federal Reserve is gearing up with more consumer protection on the home loan front, as it continues its overhaul Regulation Z.
Regulation Z is the wide-reaching Consumer Protection provision of Truth In Lending law enforced by the Federal Deposit Insurance Corporation.
The ever-evolving regulation mandates certain detailed disclosures by financial institutions in the realm of home loans and regulates certain credit card practices and credit billing disputes.
Disclosures help consumers determine if a given borrowing transaction is right for them. The greatest collapse in the housing and mortgage market in 70 years was due, in part, to consumer ignorance that caused them to buy homes they couldn't afford.
"Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances," said Federal Reserve Chairman Ben S. Bernanke in a prepared statement.
"It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset," he added.
Effective for applications on or after July 30, 2009, first and second home loan customers, as well as those refinancing have a slew of new benefits.
• Lenders must provide you initial truth-in-lending mortgage cost disclosures within three business days of your application. If not, you can back out.
• Until you receive the initial disclosure, lenders can't collect any fees, except for a credit check. Lenders and brokers previously collected appraisal, credit and other charges at the onset of the application.
• A final truth-in-lending disclosure is due three business days before closing.
• Lenders must give you a copy of the real estate appraisal three business days before the scheduled closing. Lenders often failed to informe a consumer of his or her right to a copy of the appraisal. If you never see an appraisal, you have no idea if the home is worth what you are paying.
• The lender can't close the loan until at least seven-days after applicants have or mailed the initial disclosure. That gives consumers more time to mull over the transaction.
• If there's a change that makes the annual percentage rate rise beyond a set level, say because of rising rates or inaccurate initial information, creditors must provide an additional loan cost disclosure and give you an additional three-business-day waiting period before closing the loan.
Days before the July 30 provisions took effect, the Fed pushed another round of regulatory upgrades into the public comment pipeline, this time for so-called "closed-end mortgages" and home equity lines of credit "HELOC" consumers.
A closed mortgage is a home loan that can't be paid off until its maturity date -- without substantial prepayment penalties.
A HELOC is a line of credit drawn against the equity in your home. You pay back only what you use, unlike an equity loan which grants you a fixed amount upfront and you must begin paying back immediately.
Proposed provisions for these two types of mortgages will be under discussion for at least four months and may not become law until late this year or early next.
Closed-end mortgage disclosures will focus on potentially risky features including adjustable rates, prepayment penalties, and negative amortization (a feature that cause a loan's balance to rise).
Lenders would have to:
• Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs.
• Show how the consumer's APR compares to the average rate offered to borrowers with excellent credit.
• Provide final truth-in-lending disclosures so that consumers receive them at least three business days before loan closing.
• Show consumers how much their monthly payments might increase, for adjustable-rate mortgages.
Disclosures, however, aren't always sufficient to keep mortgage consumers out of hot water. Closed mortgage rules would also
• Prohibit payments to a mortgage broker or a loan officer that are based on the loan's interest rate or other terms. Yield spread premiums, mortgage brokers obtained for steering consumers to higher cost mortgages, are targeted by this provision.
• Prohibit a mortgage broker or loan officer from otherwise steering consumers to transactions that are not in their interest in order to increase the mortgage broker's or loan officer's compensation.
For HELOCs the Fed wants to do away with generic disclosures an mandate more specific information about a HELOC that summarizes both the basics and risks at application. Shortly after application, consumers would receive new disclosures that reflect the specific terms of their HELOC.
The proposed rules for HELOCs would also
• Prohibit creditors from terminating an account for payment-related reasons, unless the consumer is more than 30 days late in making a payment.
• Provide additional protections related to account suspensions and credit-limit reductions, and reinstatement of accounts.
During the housing crisis, even consumers with excellent credit had HELOC accounts closed or limits reduced or frozen.