WASHINGTON — Complicating an already labyrinthine compliance landscape, the Federal Reserve Board issued a series of mortgage rules Monday before authority over such measures passes to the Consumer Financial Protection Bureau.
The most significant was a rule limiting the use of yield-spread premiums, an area in which the Dodd-Frank Act directs the consumer protection bureau to take tougher action once it begins operations. The Fed also proposed or finalized rules on mortgage disclosures, notification of mortgage loan sales or transfers, closed-end mortgages and escrow accounts for jumbo loans.
The yield-spread premium rule sparked the most initial debate. Consumer activists said the restrictions on the controversial practice are a good interim step till the implementation of the Dodd-Frank provisions, which essentially eliminate yield-spread premiums except where borrowers ask for them to cover the total amount of broker compensation. Others said it will sow confusion.
"It raises the question of how do you synchronize these rules with the Dodd-Frank provisions," said Laurence Platt, a partner at K&L Gates. "The view of most compliance attorneys is, we wish the Fed would go on vacation. We are trying to digest 2,300 pages of Dodd-Frank, and now we have 1,200 pages, and it's just virtually impossible to digest everything and implement new policies and procedures to comply."
As of April 1, 2011, the central bank would limit the use of compensation to mortgage originators. It would bar originators from increasing their compensation by raising a loan's costs, for example, through a higher interest rate. Compensation based on a percentage of the loan amount would still be allowed.
And the rule prohibits an originator that receives compensation directly from a borrower from also being paid by the lender. The rule tries to ensure that borrowers who agree to pay the originator directly do not also pay the originator again, indirectly, through a higher interest rate.
"The board shares concerns, however, that creditors' payments to mortgage brokers are not transparent to consumers and are potentially unfair to them," the Fed wrote in the rule. "Creditor payments to brokers based on the interest rate give brokers an incentive to provide consumer loans with higher interest rates. Large numbers of consumers are simply not aware this incentive exists."
The rule would also prohibit loan originators from "steering" a person to accept a loan that is not in his or her best interest simply to increase the originator's compensation. But the Fed allowed for a safe harbor if a consumer chooses a transaction from a choice of loans with the lowest interest rate, the second-lowest interest rate and the lowest settlement costs.
Julia Gordon, a senior policy counsel at the Center for Responsible Lending, generally praised the rule though she advocated further action.
"What's good is, today, the Fed gets us most of the way there," she said, "and when the Dodd-Frank Act is implemented, we'll get the rest of the way."
What "studies have shown is, consumers don't understand the yield-spread premium structure and generally disclosures don't work," Gordon said. "It is a little surprising to me the anti-steering safe harbor is based on disclosure, but the Dodd-Frank Act has much more specific rulemaking in this area so the Consumer Protection Bureau is going to be revising this."
Bob Davis, an executive vice president at the American Bankers Association, said the yield-spread-premium rule was the most significant of Monday's changes.
"The banking industry is going to have to work hard to adjust to the compensation procedures, but while this causes complication for bank employees, it clearly addresses a compensation problem that was at the heart of the crisis connected with nonbank lenders, ," Davis said.
In addition to the yield-spread-premium rule, the Fed also issued a proposal for enhanced consumer disclosure. It has a 90-day comment period and would increase disclosures for reverse mortgage advertising, prohibit unfair practices in the sale of reverse mortgages and require new consumer disclosures when parties agree to modify key terms of an existing closed-end mortgage.
And for all mortgages, the proposal would ensure that people have time to review their loan-cost disclosures before obligating themselves to pay fees by requiring lenders to refund the fees if the consumer decides to withdraw the application within three days after the disclosure. And it clarifies that, when a consumer requests information from the loan servicer, the information must be given within 10 business days.
Also on Monday, the Fed announced final rules for Truth in Lending Act disclosures requiring that consumers be notified within 30 days of a purchaser or assignee acquiring a sold or transferred loan.
Furthermore, the Fed issued an interim final rule to enhance disclosures about the risks of payment increases before people take out a mortgage with variable rates or payments. The new disclosures must include the initial interest rate with the corresponding monthly payment (for adjustable-rate or step-rate loans), the maximum interest rate and payment that can be imposed during the first five years and a "worst case" example of the maximum rate and payment possible during the life of the loan.
It must also include a statement that borrowers might not be able to avoid higher payments by refinancing their loans. The rule takes effect for loan applications received on or after next Jan. 30.
Finally, the Federal Reserve proposed a rule, which is open for comment for 30 days, to revise the escrow account requirements for higher-priced, first-lien jumbo loans. It would enforce a provision of Dodd-Frank requiring that the escrow requirement apply for jumbo loans only if their APRs are 2.5 percentage points or more above the applicable prime offer rate. The APR threshold for nonjumbo loans is unchanged.
