As expected, the Federal Reserve on Tuesday proposed a new set of regulations that would govern what it called "higher-priced mortgage loans," including subprime lending. HW had provided advance coverage of the announcement on Monday, and the formal announcement contained few surprises. Click here to read highlights provided by the Fed. Perhaps the only real surprise was proposed regulations regarding the use of yield spread premiums. Lenders would be prohibited from compensating mortgage brokers via YSP unless the broker previously entered into a written agreement with a borrower disclosing total compensation. Under the Fed's proposal, a consumer's written agreement with the broker must occur before the consumer applies for a loan or pays any application fees. The rest of the proposed subprime regulations were largely in line with expecations for the Fed proposal:
  • Approval must consider ability to repay at the fully-indexed rate
  • Verification of income and assets required
  • Limits on prepayment penalties, cutting such penalties off 60 days prior to any rate reset
  • Mandatory escrowing of taxes and insurance
I'd expect we'll see plenty of howling around the YSP issue in the next few weeks from the NAMB and others, as it's certainly sacred ground for most mortgage brokers -- many of whom have said that retail originators should be held to the same standard of disclosure. (For the record, what I'm seeing in the Fed's proposal seems vague enough that the term "mortgage broker" could certainly be clarified to apply to retail originators as well.) The MBA gave its first-take on the proposal, with chairman Kieran Quinn saying "it is obvious that the officials at the Fed put a lot of thought into this proposed rule." While expressing concern that some provisions might be overly restrictive, the MBA seemed generally positive to the proposal, saying it "applauded" the Fed's effort.