Alert July 28, 2009

FRB Issues Proposed Rules on Closed-End Mortgage Loans and HELOCs

The FRB issued proposed rules to amend the home-secured provisions of Regulation Z. The proposal calls for significant changes in the timing, format and content of disclosures for closed-end mortgage loans and home equity lines of credit. The proposal contains new limits on originator compensation that would effectively ban yield spread premiums. The proposal would also require lenders to include fees in the annual percentage rate calculation that are currently excluded, resulting in more loans being considered high cost or higher priced under the Truth in Lending Act. Below is a summary of the major provisions of the proposal.

Closed-End Mortgage Loans

  • At application, lenders would provide a new, one-page FRB publication on questions borrowers should ask about potentially risky loan features.
  • The following revisions to the TILA disclosures provided within three days of application would be made: (1) the calculation of the finance change and APR would be changed to capture most fees and costs paid by the borrower; (2) a new graph would be provided to borrowers showing how a borrower’s APR compares to the APRs of borrowers with excellent credit and to the APRs of borrower’s with impaired credit; (3) for adjustable rate mortgages, lenders would be required to show borrowers how their interest rate and monthly payments might change; (4) disclosures of total settlement charges would be made, similar to the same disclosures made on the Good Faith Estimate under the Real Estate Settlement Procedures Act; (4) borrowers would be given a summary of key loan features, such as loan term, amount and type; and (5) format changes would be made, including changes on type size, use of boldface for certain terms, placement of information, and highlighting certain information in a tabular format.
  • In addition to the early cost disclosures provided at application, lenders would be required to provide final TILA disclosures that borrowers must receive at least three days before the loan closing.
  • For ARMs, lenders would have to notify borrowers 60 days in advance of a change in their monthly payment (currently notice may be given 25 days in advance).
  • For payment option mortgage loans, lenders would have to provide monthly statements with information on the costs and effects of negatively-amortizing payments.
  • For forced-placed property insurance, lenders would have to provide notice to borrowers on the cost and coverage of such insurance at least 45 days before imposing a charge for the insurance.


  • The lengthy, multi-page, generic disclosure currently provided at application would be replaced with a new, one-page disclosure summarizing basic information and risks about HELOCs.
  • The disclosures of generic rates and terms provided within three days after receiving an application, would be replaced with a transaction-specific disclosure including information about rates and fees, payments and risks in a tabular form and presenting payment examples based on both the current and maximum interest rates.
  • At account opening, lenders would provide final disclosures in the same format as the disclosures provided within three days after application to facilitate comparison with the earlier disclosures.
  • Throughout the life of the account, lenders would provide enhanced periodic statements, showing the total amount of interest and fees charged for the statement period and year-to-date.
  • To the extent the terms of an account may be changed, lenders would have to notify borrowers 45 days in advance of making a change (currently notice may be given 15 days in advance).
  • Lenders would be prohibited from terminating an account for delinquency until a payment is more than 30 days late.
  • Additional requirements would be imposed on lenders regarding the reinstatement of suspended or reduced HELOCs, including requiring (1) additional information in notices of suspension or reduction about the ongoing right to request reinstatement and the lender’s obligation to investigate a request, and (2) requiring lenders to complete an investigation of a request within 30 days of receiving a request for reinstatement, and to give a notice of the investigation results to borrowers whose lines will not be reinstated. The proposal would establish a new safe harbor for suspending or reducing a line based on a “significant” decline in property value. For HELOCs with a combined loan-to-value ratio at origination of 90% or higher, a 5% decline in property value would be considered “significant.” The proposal also provides additional guidance regarding the information on which a lender may rely to take action based on a material change in the borrower’s financial circumstances, such as the type of credit report information that would be appropriate to consider.

All Mortgage Loan Transactions

  • Payments to a mortgage broker or a lender’s loan officer based on the loan’s interest rate or other terms would be prohibited.
  • Mortgage brokers and loan officers would be prohibited from “steering” borrowers to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation.
Comments on the proposal are due 120 days after publication of the proposal in the Federal Register. Click here for the press release, containing links to related materials, and here for the proposal.