November 13, 2009 - "News You Can Use"

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Executive Summary – Federal Reserve Proposals

In July, 2009, the Federal Reserve Board proposed changes to the mortgage provisions of the Truth in Lending Act (TILA). The proposal would

• limit the payment of yield spread premiums to originators
• prevent originators (including bank loan officers) from steering borrowers to mortgage products when there are incentives tied to other loan terms, such as higher interest rates or prepayment penalties, that increase the lenders' profits
• require lenders to warn prospective borrowers of risky loan features such as adjustable rates, prepayment penalties and negative amortization
• include more of the closing costs in the APR calculation, such as appraisals and title fees
• require lenders to give prospective borrowers a chart showing how their APR compares with the APRs offered to borrowers with excellent credit
• for HELOCs, provide “Key Questions to Ask about Home Equity Lines of Credit,” to borrowers within three days of application
• require lenders to provide final TILA disclosures at least three business days before loan closing
• require lenders to show consumers how much their monthly payments might increase for adjustable-rate mortgage (ARM) loans

The current practice of disclosing all loan terms on a product specific disclosure would continue.

Recognizing some beneficial uses, the proposal does not ban the practice of compensating mortgage brokers through the interest rate but intends to put limits on the more abusive uses of yield-spread premiums. Straight commission based on fee revenue would be banned.  Compensation based on loan volume, the performance of loans delivered by an originator or hourly wages is permissible under the proposal. A consideration is whether the rule should allow compensation based on the loan amount. The Fed's latest proposal would ban incentive payments to all loan originators - mortgage brokers or bank loan officers.

The massive proposal is out for comment until December 24, 2009. Click here to review

If you would like to comment you should be specific in your comment. We recommend stating that your consumers are already confused by duplicative disclosures, and that the GFE proposal is already provides the information delivered in the proposed changes. A second closing cost and yield spread disclosure would create more challenges for the home-buying public. Advocate for the abandonment of multiple disclosures in favor of ONE SINGLE UNIFORM DISCLOSURE.  Respond HERE

HUD and Federal Reserve Coordinating

Similar to the HUD rule going into effect 1/1/10, the proposed rule requires a flat fee stated upfront that cannot be increased by changes in the loan terms. The Fed is working with HUD to make the TILA and RESPA mortgage disclosures more compatible and possibly merge them. If the Consumer Financial Protection Agency is authorized, the Obama administration will develop a uniform mortgage disclosure.

Temporary Buydowns - Is this really the kind of product that created the Mortgage Meltdown?...

At QuickStart we have been going through the process of getting our courses approved through the NMLS.  We were surprised by some of the reviewer's comments on what we feel are common treatments of loan programs, but none as much as those referring to the use of temporary buydowns. 

In today's climate the temporary Buydown (2-1 or 1-0) is a program that allows payment rate reduction for qualifying purposes on a fixed rate loan.  It is one of the few remaining tools loan originators have to help borrowers with difficulty in qualifying.  What objection could a regulator really have with regard to this product? 

The negative feature of a temporary Buydown is that payments are going to increase.  This raises the specter of payment shock.   However, unlike any other changing rate product -such as adjustable rate mortgages -the payment changes are predictable and much smaller than potential changes on interest rate capped adjustable rate mortgages.  In fact, a 2% increase in interest rate would result in a payment that changes by nearly 20%, whereas the Buydown Payment only increases by 9%.  The amount of additional income required to maintain parity with the Buydown payment increase (based on a 28% qualifying ratio) is only 2.5%-3%, less than what many cost of living adjustments are. 

As an originator, we want to be able to balance the needs of a borrower who has increasing income but whose current income does not allow them to meet his or her housing needs.  We cannot simply arbitrarily increase the amount of a borrower's loan, but if we can use a factually accurate approach, the temporary Buydown can help meet a family's needs. 

For a free lesson on temporary buydowns, please register for FREE TRAINING - we have two sites

Resource Based Training Catalog - www.quick-start.net/freetrainingregistration.htm -

Online Training Catalog - http://www.ezlcms.com/v2/login/897/catalog.asp

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