Mortgage brokers nationwide breathed a collective sigh of relief on Monday, as the Federal Reserve unveiled an overhaul to Regulation Z
, which sets forth Truth-in-Lending standards for lenders -- for all of what was included in the final measure, it's what wasn't that likely drew the most interest. The final rule, approved by the Federal Reserve Board
on Monday, removed hotly-contested language governing disclosures and limits on yield spread premiums.
Under the Fed's original proposal last December, lenders would have been prohibited from compensating mortgage brokers via YSP unless the broker previously entered into a written agreement with a borrower disclosing total compensation -- before the consumer began the loan application process.
The Fed said it pulled the proposed rule "based on compelling evidence from consumer testing," but warned that it would later revisit the issue in an ongoing rule review.
Widening the net
Beyond yanking the YSP language, the final Fed rule also surprised some by tightening the definition of loans covered by the updated TILA regulations; many of the new rules will apply to so-called "high cost loans," defined as first liens at more than 1.5 points above the average offer rate recorded for conforming 30-year fixed rate mortgages, released each week by Freddie Mac. For second liens, that limit is pushed out to 3.5 points above the average prime offer rate, the Fed said.
Both of the final limits could significantly widen the net of loans, sources told HW on Monday morning -- the original Fed proposal had pegged the limit at 3 and 5 percent above the prime offer rate, respectively -- and may end up hitting more than subprime borrowers, given current mortgage market dislocation.
"Some jumbo borrowers have seen rate spreads approaching the Fed's new definition of high cost," said one source, an originator that asked not to be identified in this story.
For loans defined as high-cost, the revamped TILA regulations will ban stated income and related lending practices, as well as forcing lenders to assess repayment ability based on the highest scheduled payment in the first seven years of the loan; the new regulations also put significant limitations on prepayment penalties and require borrowers to escrow for taxes and insurance during the first year of their loan.
Will the changes matter?
Be prepared to wait to see any of the changes take effect; the Fed said that the majority of the new TILA regulations won't go into effect until October of 2009 -- and the escrow requirement won't be active until October 2010. Which means that these aren't short-term, help the market now
sort of changes to lending terms.
The longer-term focus of the regulations had some questioning whether the changes would matter much, while others said wider provisions in the TILA revision lacked teeth.
"I doubt you'll see a huge private-party market emerge over the next 10 years for subprime lending, which is where this 'new TILA' targets," said one executive at a national bank, who asked not to be named. "The emergence of the FHA is likely to be a relatively long-term event for this industry, both because of market forces and likely legislation."
Beyond the high-cost provisions in the TILA amendments, more general provisions prohibiting appraiser coercion on all loans and mandating the correct crediting of customers accounts by mortgage servicers are likely to have limited impact, industry sources said.
"These provisions are needed to wrap a safety net around portions of the industry, and to set a precendent that outlaws certain bad behavior -- a la appraiser pressuring," said HW's source. "But they're not game-changing right now, beyond potentially the banning of stated income and possible crossover into jumbo lending markets."
Nonetheless, Fed chief Ben Bernanke used the rules to crow about getting tough on bad actors in the lending market.
"We will work collaboratively with our fellow regulators, both state and federal, to see that the rules are consistently applied and vigorously enforced," he said in a press statement. There likely won't be much work to do, however, given that the subprime lending market has largely flown the coop at this point.
Likewise, Fed governor Randall Krozner spoke of "restoring confidence in our mortgage system." Which may help soothe the nation's psyche, certainly -- but it doesn't change the fact that the nature of the amended regulation (and the effective date tied to it) amounts to closing the barn door long after all the animals have already run free.