Austin REAL ESTATE

National Regulation 
 

The Federal Reserve who regulates and enforces the Truth in Lending Act, TILA, Reg Z, published its final rule this week within a massive 419 pages.
 

Here are a few of the Salient Features from this Washington Regulator. They are informed and reasonable for a change when compared to some of the provisions proposed by Legislators.

1. Reference to Yield Spread Premiums, YSP, required disclosure by Mortgage Brokers Only was stricken from the final rule.  This was based on compelling evidence from consumer testing.  We can thank National Association of Mortgage Brokers, NAMB, for their diligence for that achievement and also those who voiced their objection based on unfairly singling out Mortgage Brokers.
 

2. TILA establishes a new category labeled "higher-priced mortgages" which virtually defines all sub prime fixed term loans.  The Federal Reserve will publish an index called the "Average Prime Offer Rate".  Higher-priced mortgage loans will be considered those that are 1.5% higher on a first lien and 3.5% higher on a second lien. This is targeted to define a sub-prime loan.

3. Requires a lender to consider the borrower's ability to pay from their income and other assets, but not from the presumed resale value of the subject property.
 

4. Lender must assess the repayment ability, i.e. debt to income ratios, based on the highest scheduled payment during the first 7 years of the loan.  Lender can’t use a low initial teaser rate to qualify.
 

5. Lender can't rely on the income or assets it doesn't verify.  No more SISA on sub-prime loans.
 

6. If payment can change, such as an arm loan, during the first 4 years, prepayment penalties are banned.  For other high priced loans, prepayment penalties can not last longer than the first 2 years of the loan.
 

7. All higher-priced loans must initially require Escrow Accounts for Taxes and Insurance the first year and offer the borrower the opportunity to cancel the escrow account after the first year.
 

8. Prohibits broker, creditor, or lender from coercing an Appraiser to misrepresent the value of a home.
 

9. Requires that creditors must provide a Good Faith Estimate, GFE, within three days after consumer applies for a mortgage.  TILA will have extended requirements beyond RESPA’s current version. HUD has a proposed version of the GFE in their proposed rewrite of RESPA.  (Coordination will be required.)
 

10. The TILA Rule also bans seven deceptive advertising practices including saying the payment is fixed when it could change.
 

Fed Chairman Ben Bernanke noted that these rules apply to all mortgage lenders, a uniform set of rules will level the playing field, increase competition and ultimately will benefit the borrowers.
 

Compliance with the New Rules (other than escrow requirements) is mandatory for all applications received on or after October 1, 2009.     

It is very encouraging that Dr. Bernanke and the Federal Reserve, in their rewrite of TILA, have addressed difficult issues in an informed and reasonable manner, which should lead those issues to be stricken from the proposed House and Senate bills.