New Additions to Truth in Lending


Back in July the Federal Reserve agreed on a new set of consumer protections in the home mortgage market. [For my serious geek readers it is an amendment to Regulation Z - the Truth in Lending Act - and was adopted under the Home Ownership and Equity Protection Act - HOEPA.] The new rules apply to all lenders and add four key protections for a "newly defined category" of higher priced mortgage loans. These are loans with interest rates 1.5 percent higher than the going rate.

For loans in this category, these protections will:

  • Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
  • Require creditors to verify the income and assets they rely upon to determine repayment ability.
  • Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
  • Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

"These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system," said Governor Randall S. Kroszner in a press release back in July.

My first reaction is: Duh.

Okay, not so erudite, but I ask myself why we need these regulations?

Why, after the total meltdown of the mortgage market and subsequent meltdown of the U.S. banking system and subsequent meltdown of the U.S. economy, would the mortgage market ever go back to the practices that got us all here today?

"To some extent I guess we're closing the barn door after the horse has left in terms of this, but it's trying to make sure this doesn't happen again down the road," says Guy Cecala of Inside Mortgage Finance. It's also Washington in general, and the Fed specifically, finally stepping in, amid all the criticism about, as Cecala says, "being asleep at the wheel when it comes to regulating mortgage lending," making a real effort to be a meaningful regulator.

The new rules also ban deceptive or misleading mortgage advertising, like saying a loan has a low fixed rate when it really doesn't. Gee, that might have been nice to have five years ago.

Questions? Comments?