Regulation Z  
Courtesy of: Theresa Ballard, Chief Executive Officer, BFO Solutions  

The News Channels and  the internet has been quite active in the last couple of days with information about the Federal Reserve Board's approval of a final rule on an amendment to Regulation Z.  The final rule was issued on Monday July 14, 2008 and was designed to prohibit unfair, abusive or deceptive mortgage lending practices.  The rule also established new advertising and disclosure requirements.  

What does this rule mean to you?

1. Compliance with the new rule is mandatory for all applications received after October 1, 2009.  The exception to this date is the portion of the rule dealing with Impound (Escrow) Accounts.  The Impound (Escrow) requirement has an effective date of April 1, 2010 for site built homes and October 1, 2010 for Manufactured Homes.
2. All mortgage loans will have new advertising requirements. Advertising must contain additional information about rates, monthly payments, and other loan features.  The rule specifically bans seven (7) deceptive or misleading advertising practices, including representing that a rate or payment is "fixed" when it can change.
3. A new category of "higher priced mortgages" was established.  This new category includes virtually all closed-end sub-prime loans that are secured by a Borrower's principal dwelling.
   
4. Ability to pay must be established for the Borrower.  The rule will prohibit a Lender from making a loan without regard to the Borrower's ability to repay the loan from income or assets.  The ability to pay will be established in part, by using the highest scheduled payment in the first seven years of the loan.   To prove that a Lender has violated this prohibition, a Borrower not need to demonstrate that the violation was part of a "pattern of practice."
5. Stated and No Income loans will not longer be allowed for loans falling into this new category of loans. Income and assets must be verified for all loans that fall into the new category of loans.  
   
6. The rule will ban any prepayment penalty if the payment can change during the initial four (4) years.  For other higher priced loans, a prepayment penalty period cannot last for more than two (2) years.
   
7. The rule requires loans within the new category of loans have Impound (Escrow) accounts for property taxes and homeowners insurance.  Opting out of impound accounts will no longer be an option, for this category of loan. The good news is that the Borrower will have an ability to cancel the Impound (Escrow) account after one (1) year.
   
8. Lenders will be required to credit payments to the Borrower's account as of the date the payment is received.
9. Lenders must provide a payoff statement within a reasonable period of time and will be prohibited from "pyramiding" late fees.
10. Lenders and Brokers are prohibited from coercing or encouraging an Appraiser to misrepresent the value of a home.
    
11. Creditors must provide a Good Faith Estimate of loan costs, including a schedule of payments within three (3) days after the Borrower applies for any mortgage secured by the Borrower's principal dwelling; to include loans such as home improvement loans to refinance an existing loan.