Chairman Ben Bernanke stressed that the hefty package of Regulation Z revisions approved by the Federal Reserve Board (Fed) on July 14 will “level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers.” Bernanke also said the Fed will work collaboratively with fellow regulators, both state and federal, to see that the rules are “consistently applied and vigorously enforced.”

That across-the-board enforcement has been a key element in winning the banking industry’s support for the revisions. The American Bankers Association said it “strongly supports the rule’s application of a uniform standard to all financial firms that make mortgage loans, including non-federally regulated lenders.” ABA also said its members “are already adhering to the loan origination, underwriting and servicing standards that protect mortgage customers and the bank.”

Although most of the new rules crack down on unfair, abusive, or deceptive lending and servicing practices in a new category of “higher-priced mortgages,” not all of the provisions are limited to the subprime market. Some apply to all closed-end mortgages secured by a consumer’s principal dwelling and others apply even more broadly, to all mortgages.

“Higher Priced Mortgage Loans”

For a newly defined category of “higher-priced mortgage loans” the final rules:

• Prohibit creditors from extending credit without regard to a consumer’s ability to repay from sources other than the collateral itself.
• Require creditors to verify income and assets they rely upon to determine repayment ability.
• Prohibit prepayment penalties except under certain conditions.
• Require creditors to establish escrow accounts for taxes and insurance, but permit creditors to allow borrowers to cancel escrows 12 months after loan consummation.

All Mortgages

For all consumer–purpose, closed-end loans secured by a consumer’s principal dwelling, the rules:

• Prohibit any creditor or mortgage broker from coercing, influencing, or otherwise encouraging an appraiser to provide a misstated appraisal in connection with a mortgage loan.
• Prohibit mortgage servicers from “pyramiding” late fees, failing to credit payments as of the date of receipt, or failing to provide loan payoff statements upon request within a reasonable time.

New Disclosure and Advertising Rules

The final rules also require creditors to provide transaction-specific mortgage loan disclosures, such as the APR and payment schedule, for all home-secured, closed-end loans no later than three business days after application and before the consumer pays any fee except a reasonable fee for the review of the consumer’s credit history.

For both open-end and closed-end mortgage loans, the rules require that advertisements provide accurate and balanced information, in a clear and conspicuous manner, about rates, monthly payments, and other loan features. The rules also prohibit seven deceptive or misleading practices in advertisements for closed-end mortgage loans, including advertising “fixed” rates or payments without adequately disclosing that the interest rate or payment amounts are “fixed” only for a limited time.

If all this sounds like a substantial increase in regulatory burden, even for lenders that never come within a country mile of a subprime loan, that’s because it is. As the Fed concluded in its regulatory flexibility analysis, the new mortgage provisions will have a “significant economic impact” on institutions.

Fortunately, the Fed has provided a liberal implementation period. Most of the new rules take effect on October 1, 2009. The requirement to establish an escrow account for taxes and insurance is effective on April 1, 2010 for higher-priced mortgage loans, and on October 1, 2010 for higher-priced mortgage loans secured by manufactured housing.