Fed Unveils Long-Awaited HOEPA Rules

The Federal Reserve Board is proposing a "robust set" of rules to clean up subprime lending practices and to address unfair and deceptive practices associated with servicing, mortgage broker fees, and appraisals.On subprime and higher-priced alternative-A mortgages, the Home Ownership and Equity Protection Act proposal would create an ability-to-repay standard, require lenders to verify income and assets to curb stated-income lending, mandate escrow accounts for at least 12 months, and require prepayment penalties to expire 60 days before the first monthly increase in payments. Under pressure from Congress, the Fed was expected to address those subprime practices. However, the Fed decided that it needed to go further to provide a robust and "more comprehensive set of protections" that apply to all mortgages, said Randall Kroszner, a Fed governor. The proposal requires brokers to disclose up front the dollar amount of their fees, including yield-spread premiums, in a written agreement with the borrower. "Creditor payments to a mortgage broker could not exceed the total compensation amount stated in the written agreement," according to the proposal, which is being issued for a 90-day comment period. Servicers could be sued under the Truth in Lending Act for failing to post mortgage payments properly and pyramiding late fees. Lenders and brokers also would be liable for coercing appraisers. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," Fed Chairman Ben Bernanke said.