More on the Guidance on Subprime Mortgage Lending

by Jeff Sovern

Over the weekend, Brian Wolfman blogged about the proposed Interagency Guidance on Subprime Mortgage Lending.  The draft Guidance, which is proposed by the Fed, OCC, OTS, FDIC, and the National Credit Union Administration, can be found here.  The Guidance implies that the Agencies have concluded that the Truth in Lending Act (TILA) is not functioning satisfactorily in at least two respects with repect to certain subprime loans (particularly certain adjustable-rate mortgages): the content of TILA's disclosures and its requirement that  disclosures be provided no later than consummation.  Thus, the Guidance states with repect to these loans that "communications with consumers, including advertisements, oral statements, and promotional materials should provide clear and balanced information about the relative benefits and risks of the products. This information should be provided in a timely manner to assist consumers in the product selection process, not just upon submission of an application or at consummation of the loan." 

The Guidance also reports that "The Agencies are concerned that subprime borrowers may not fully understand the risks and consequences of obtaining certain adjustable-rate mortgage (ARM) products." The Guidance adds that "Information provided to consumers should clearly explain the risk of payment shock and the ramifications of prepayment penalties, balloon payments, and the lack of escrow for taxes and insurance, as applicable.. . . [M]ortgage product descriptions and advertisements should provide clear, detailed information about all of the costs, terms, features, and risks of the loan to the borrower." 

If the Guidance takes effect in its current form, lenders that comply with TILA may sometimes have to do still more to comply with the requirements set forth in the Guidance.  I wonder if that will lead to revisions in TILA.

The Agencies are seeking comment on the proposed Guidance.  Perhaps some readers of the Consumer Law and Policy Blog will feel moved to submit comments and in turn prompt revisions in the Guidance.

Comments

[brian]

In your view, will the guidance have the force of law if it is finalized? It may bind the agencies (to the extent that it imposes any obligations on them), but will it bind the public, that is, the industries targeted by the guidance?

[JeffSovern]

A good question, by which I mean that I'm not sure of the answer (which is what people often seem to mean by that phrase). Because the Guidance mentions the phrase "safety and soundness" and regulators examine banks to insure that their loans comply with safety and soundness rules, it probably means that regulators will take the Guidance into account when conducting those examinations, and that lenders that fail to comply with the Guidance may be found to have acted unsafely and unsoundly. But I don't know enough about banking law to be certain of that, or to know whether the Guidance has any other binding effect--but I imagine it would have a persuasive impact generally, and might inspire negligence per se arguments.