The Federal Reserve Board, in response to consumer testing results, proposed significant changes to Regulation Z — Truth in Lending Act (TILA) — in an effort to improve disclosures and prevent “unfair practices” in mortgage broker compensation. The Fed’s proposal would prohibit payments to a mortgage broker or loan officer that are based on the interest rate or other terms, and would prohibit a mortgage broker or loan officer from “steering” consumers into transactions that are “not in their interest” in order to increase the compensation paid to brokers and officers. Broker compensation is an issue long contested between regulators and industry players. Last year, the Fed withdrew a proposed rule on Regulation Z regarding yield-spread premiums — a certain type of compensation paid to brokers based on the difference between the mortgage rate for which a borrower qualifies and the actual rate locked into by brokers on specific loans — but warned it would analyze “alternative approaches” to the issue. Thursday’s proposal also aims to improve the disclosures received by consumers on mortgages and home-equity lines of credit (HELOCs). “Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply,” said Fed governor Elizabeth Duke in a statement Thursday. “With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization.” The Fed’s proposal would require that annual percentage rate (APR) disclosures capture most fees and settlement costs paid by borrowers on closed-end mortgages. It would also require lenders to show how the consumer’s APR compares with the “average rate” offered to borrowers with credit considered excellent, as well as how much their monthly payments might increase for adjustable-rate mortgages. The Fed is calling for a one-page, Fed-approved publication on the risks of HELOCs at the time of application. Then, the consumer would receive new disclosures addressing the terms of their specific credit plans. The Fed is also calling to prohibit creditors from terminating an account for payment-related reasons unless the consumer is more than 30 days late in making a payment, and to provide additioanal protections related to account suspensions and credit-limit reductions, and reinstatement of accounts. The Fed also said it will work with the US Department of Housing and Urban Development (HUD) to coordinate the disclosures mandated by TILA and HUD’s disclosures required by the Real Estate Settlement Procedures Act. A complementary enforcement of these disclosures could potentially result in a single disclosure form that creditors could use to satisfy both laws, according to the Fed. Write to Diana Golobay.

More: