Subprime Lending and the Fed

The Fed today proposed new regulations for subprime lending under the authority granted by HOEPA.  The Fed's press release is here.  Here are some excerpts:

The proposal includes four key protections for “higher-priced mortgage loans” secured by a consumer’s principal dwelling:

• Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
• Creditors would be required to verify the income and assets they rely upon in making a loan.
• Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.
• Creditors would have to establish escrow accounts for taxes and insurance.

The rule would define “higher-priced mortgage loan” to capture loans in the subprime market but generally exclude loans in the prime market.  A loan would be covered if it is a first-lien mortgage and has an annual percentage rate (APR) that is three percentage points or more above the yield on comparable Treasury notes, or if it is a subordinate-lien mortgage with an APR exceeding the comparable Treasury rate by five points or more.

* * *

The following protections would apply to all loans secured by a consumer’s principal dwelling, regardless of the loan’s APR:

• Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts.  A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.  The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees. 
• Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans would be prohibited from engaging in certain practices.  For example, servicers would be required to credit consumers’ loan payments as of the date of receipt and would have to provide a schedule of fees to a consumer upon request.

The proposed revisions to TILA’s advertising rules require additional information about rates, monthly payments, and other loan features.  The amendments also would ban seven deceptive or misleading advertising practices, including representing that a rate or payment is “fixed” when it can change.  * * *

The Times coverage is here.  Meanwhile, today's edition of the Times had a lengthy but important story about how regulators, and in particular the Fed, failed to act to prevent or at least reduce the severity of the subprime crisis.  The article is titled "Fed Shrugged as Subprime Crisis Spread."  The article provides a case study in how regulation can prevent a crisis created by market failures--but didn't (which offers further support for an Alan White comment last week).

Comments

[Albert Franklin]

Maybe FINRA can sort through more of what is happening with subprime houseing defaults! http://www.finra.org/

[Rbrown]

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