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Volume 9, Issue 3, 2009   Federal Reserve Bank of Dallas

A Summary of Consumer Protection Regulatory Changes

"It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset. Our consumer testing is designed to ensure this information will be presented in language consumers understand, in a format that is easy to use and at a suitable time."

Ben Bernanke
  Federal Reserve Chairman
  July 23, 2009

Many regulatory changes go into effect in 2009 and 2010 as the government works to increase the knowledge of consumers who are shopping for credit.

RESPA Amendments

Changes to the Real Estate Settlement Procedures Act (RESPA) will go into effect in January 2010 and will require new disclosures from mortgage lenders, including the Good Faith Estimate (GFE). Some of the new rules are:

  • Lenders may not collect any fee, except for a credit report fee, prior to providing the GFE to the consumer.
  • Terms quoted in the GFE must be available for at least 10 business days from the date of delivery of the GFE.Good Faith Estimate Form
  • A revised GFE must be delivered to the customer within three business days if terms are changed.
  • Actual fees may not exceed established tolerances:
    • 0 percent from disclosed amount for origination charge, points and transfer taxes.
    • 10 percent from disclosed amount for required services where provider is chosen by the lender or borrower chooses provider from a lists, such as title services, title insurance and government recording charges.
    • Can change: required services where borrower picks provider, initial escrow deposit, per diem interest and homeowners insurance.


Regulation Z Amendments and Truth in Lending Act (TILA)

Changes to the Mortgage Disclosure Information Act were effective in July 2009 and expanded the types of loans that require disclosure under Reg Z. The earlier rule only applied to the purchase or refinance of a consumer's principal dwelling; it now applies to the purchase, refinance or home equity borrowing on any dwelling of a consumer, regardless of whether it is the consumer's principal dwelling.

Requirement for Redisclosure
Early Truth in Lending Act (TILA) disclosures must be provided within three business days of application and prior to collecting any fees other than the credit report fee. The lender must wait seven business days after providing early disclosures before closing the loan. In addition, if the annual percentage rate (APR) provided in early disclosures changes, the lender must provide new disclosures and wait an additional three business days before closing the loan. The lender may provide a complete set of new disclosures or redisclose only those terms that vary from the original disclosure. If the APR on the early truth-in-lending disclosures increases or decreases by more than 1/8 of 1 percent (0.125), the lender must redisclose by providing a corrected version of the APR to the borrower. The lender must wait an additional seven days to allow the borrower to reconsider the transaction before the new closing date.

Higher-Priced Mortgages
Effective October 2009, a new category of higher-priced mortgage loans has been defined as closed-end consumer credit transactions secured by the consumer's principal dwelling where the (1) first-lien APR exceeds the average prime offer rate (APOR) by 150 basis points, or (2) subordinate-lien APR exceeds the APOR by 350 basis points. The APOR is a survey-based estimate of APRs currently offered on prime mortgages of a comparable type.

New Rules for Higher-Priced Mortgages and High-Cost Mortgages (HOEPA)
There are new rules for both higher-priced and high-cost mortgages to determine a borrower's ability to repay and restrictions on prepayment penalties. In addition, lenders are now required to establish an escrow account for taxes and insurance for first-lien higher-priced mortgages.

Borrower's Ability to Repay
Lenders must now consider and verify the borrower's ability to repay the loan using the largest principal and interest payment scheduled within the first seven years of the loan. Additional guidance has been issued on determining a customer's ability to repay a short-term balloon in CA Letter 09-12off-site.

Consideration of consumer's ability to repay must include:

  • Current and reasonably expected income
  • Employment
  • Assets other than the collateral
  • Current obligations
  • Mortgage-related obligations (property taxes, insurance)

Verification of any of the following documents can be used to determine income:

  • IRS Form W-2
  • Tax returns
  • Payroll receipts
  • Financial institution records
  • Check-cashing or remittance receipts
  • Written statement from the consumer's employer
  • Other third-party documents

Limitations on prepayment penalties

  • Cannot apply after two years from consummation
  • Cannot apply if source of funds is refinancing by same creditor or an affiliate
  • P&I payment may not change during the first four years of the loan

Escrow requirement

  • Escrows for property taxes and insurance are required for high-cost mortgage loans secured by a first lien on a principal dwelling.
  • After one year, creditors may allow a consumer to cancel the escrow account.

Loan servicing prohibitions

  • Failing to credit a payment to an account as of the date received
  • Pyramiding of late fees
  • Failing to provide a payoff statement within a reasonable time of request

Regulation C Amendments

Reg C implements the Home Mortgage Disclosure Act (HMDA). A change to Reg C requires a lender to report the spread between the APR and the APOR. The APOR is published weekly, and the FFIEC websiteoff-site provides a calculator. Higher-priced mortgage loan rules cover home purchase and refinance, as well as home equity loans. This rule does not cover home equity lines of credit, reverse mortgages, construction-only loans, bridge loans with terms less than one year, or purchase or improvement of a second home, unless the loan was secured by the consumer's principal dwelling. It also does not cover loans for real estate investment.

Helping Families Save Their Homes Act of 2009

For any loan secured by the principal dwelling of a consumer, a new notice of sale or transfer of the loan must be sent to the borrower no later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party. The new owner or assignee of the debt must notify the borrower even if the loan servicer remains the same.

Protecting Tenants at Foreclosure Act of 2009

  • The tenant has a right to remain in the property and cannot be evicted for the remaining term of an existing lease, except for actions that constitute good cause.
  • The new owner may not evict the tenants without giving the tenant a minimum 90-day notice, following the term of the existing lease.
  • Expires December 31, 2012.
  • Read moreoff-site

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act

  • Read about the Credit Card Accountability, Responsibility and Disclosure Actoff-site
  • With few exceptions, creditors cannot raise interest rates or fees during the first year after the account is opened.
  • After the first year, the rate may be raised on future purchases with a 45-day advance notice. The notice shall advise the consumer of the right to cancel the account.
  • Credit issuers cannot raise interest rates on existing balances except under any of the following conditions:
    • Increase is due to variable interest rate.
    • At the end of the promotional period (at least six months) and with proper notice.
    • If the required minimum payment is not received within 60 days after the due date.

CARD Act Protections for Young Consumers

The act will prohibit:

  • Credit card issuers from lending to anyone under the age of 21 without a cosigner or proof of ability to make payments.
  • Unsolicited card offers to everyone under age 21.
  • Offers to students to sign up for a credit card with any tangible item on or near a college campus or a college-sponsored event.

A study conducted by student loan investment company Sallie Mae found that graduating seniors had an average credit card debt of $4,100, up from $2,900 four years ago. The study also found that the percentage of incoming students with a credit card in hand had increased to 39 percent from 23 percent in 2008, and only 15 percent of those freshmen had a zero balance on their credit cards compared with 69 percent in 2004.

In the 2007 legislative session, Texas lawmakers approved House Bill 85, requiring public colleges and universities to incorporate a credit card and debt education and counseling session into any orientation program for new students. This law requires the governing board of the educational institution to designate the times and locations credit card vendors may use for marketing activities on campus.

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e-Perspectives, Volume 9, Issue 3, 2009

Federal Reserve Bank of Dallas Off-site page
Community Development Office Send an e-mail
P.O. Box 655906, Dallas, Texas 75265-5906
Gloria Vasquez Brown Send an e-mail
Vice President
    Alfreda B. Norman Send an e-mail
Assistant Vice President and Community Development Officer
Jackie Hoyer Send an e-mail
Houston Branch
Senior Community Development Advisor
    Julie Gunter Send an e-mail
Senior Community Development Advisor
Wenhua Di Send an e-mail
Community Development Economist
    Elizabeth Sobel Blum  Send an e-mail
Community Development Research Associate
Roy Lopez Send an e-mail
Community Development Specialist
The views expressed are the authors' and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Development Office.
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