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Fed Publishes Wave of Rules for Mortgage Origination Transparency

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The Federal Reserve Board today announced a batch of final and interim rules designed to increase the transparency of the mortgage origination and disclosure processes. The Fed is also proposing a number of rules to improve the clarity and accountability around reverse and jumbo mortgage origination.

The Fed released final rules restricting an originator from receiving compensation based on the interest rate or other loan terms of the mortgage. The new rules apply to mortgage brokers and the companies that employ them, as well as loan officers employed by depository institutions and other lenders.

Some originators — like brokers — have been the object of public criticism for allegedly steering borrowers into loans with interest rates higher than the rate required by lenders, in order to receive higher yield-spread premiums.

"This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points," the Fed said. "Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice."

The final rule also prohibits originators from receiving compensation directly from consumers while also receiving compensation from the lender or another third party.

"In consumer testing, the board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer's total loan cost," the Fed said. "The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize."

The Fed also announced final rules to implement an amendment to the Truth in Lending Act that requires consumers be given notice within 30 days of the sale or transfer of their mortgage loan.

Additionally, the Fed issued an interim rule that requires lenders to disclose a "worst case" payment scenario for borrowers of adjustable-rate mortgages.

Along with the final and interim rules, the Fed proposed consumer protections and disclosures on mortgage transactions. As the second phase of the Fed's review and update of mortgage rules, the proposal would affect Reg Z.

The proposal would improve disclosures that consumers receive for reverse mortgages and impose rules for accurate product representation in reverse mortgage advertising. It would also prohibit certain unfair practices in the sale of financial products related to reverse mortgages.

The Fed's proposal would improve disclosures of borrowers' rights to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right. Additionally, it would ensure consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan.

The Fed also proposed a rule to revise the escrow account requirements for higher-priced first-lien jumbo mortgage loans. The rule would implement a provision of the Dodd-Frank Act and increase the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbos.

The rule would implement the Dodd-Frank provision to increase the APR threshold to 2.5 percentage points — from the current 1.5 percentage points.

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