Reg Z HOEPA Initial Press Release

FRB: Press Release--Request for comment on changes to Regulation Z to protect consumers... unfair or deceptive home mortgage lending and advertising practices--December 18, 2007

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Home > News & Events > 2007 Banking and Consumer Regulatory Policy

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Release Date: December 18, 2007
For immediate release
The Federal Reserve Board on Tuesday proposed and asked for public comment on changes to Regulation Z (Truth in
Lending) to protect consumers from unfair or deceptive home mortgage lending and advertising practices. The rule, which
would be adopted under the Home Ownership and Equity Protection Act (HOEPA), would restrict certain practices and
would also require certain mortgage disclosures to be provided earlier in the transaction.
The Home Ownership and Equity Protection Act amended the Truth in Lending Act (TILA). Under HOEPA, the Board has
the responsibility to prohibit acts and practices in connection with mortgage loans that it finds to be unfair or deceptive.
“Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy,” said
Federal Reserve Chairman Ben S. Bernanke. “We want consumers to make decisions about home mortgage options
confidently, with assurance that unscrupulous home mortgage practices will not be tolerated.”
The proposal includes four key protections for “higher-priced mortgage loans” secured by a consumer’s principal dwelling:
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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.
“Unfair and deceptive practices have harmed consumers and the integrity of the home mortgage market,” said Federal
Reserve Board Governor Randall S. Kroszner. “We have listened closely and developed a response to abuses that we
believe will facilitate responsible lending.”
The following protections would apply to all loans secured by a consumer’s principal dwelling, regardless of the loan’s APR:
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Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread

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FRB: Press Release--Request for comment on changes to Regulation Z to protect consumers... unfair or deceptive home mortgage lending and advertising practices--December 18, 2007

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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.
Under the proposal, creditors would have to provide a good faith estimate of the loan costs, including a schedule of
payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling,
such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required
for home-purchase loans. In addition, consumers could not be charged any fee until after they receive the early
disclosures, except a reasonable fee for obtaining the consumer’s credit history.
The Federal Reserve has engaged in extensive outreach efforts with consumer groups, the financial services industry,
lawmakers, and others to ensure that the proposed rules are likely to achieve the goal of protecting consumers from unfair
practices without shutting off access to responsible credit. The proposal takes into consideration testimony given at four
public hearings the Board held in the summer of 2006, and a hearing held in June 2007, as well as public comment letters
received in connection with those hearings. The Board also consulted with other federal and state agencies and its own
Consumer Advisory Council.
The Federal Register notice is attached. The comment period ends ninety days after publication of the proposal in the
Federal Register, which is expected shortly.
Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z
Statement by Chairman Ben S. Bernanke
Statement by Governor Randall S. Kroszner
Federal Register Notice 425 KB PDF | TEXT
Board meeting materials
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2007 Banking and Consumer Regulatory Policy

Last update: December 18, 2007

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