Editor’s note: This story has been corrected to clarify that the the Federal Reserve Board is not dropping planned changes to rules governing loan officer compensation, which will take effect April 1. The story had previously been updated to include comments from mortgage industry groups.
The Federal Reserve is backing down from a slew of proposed changes to mortgage loan disclosures, saying authority in that arena will soon be transferred to the new Consumer Financial Protection Bureau.
The Fed’s proposed changes to mortgage loan disclosures were over a year in the making, prompted by criticism that homebuyers often didn’t understand the true cost and terms of mortgages taken out during the boom.
The situation was complicated by the fact that borrowers get two sets of federal mortgage disclosures: one addressing Truth in Lending Act (TILA) requirements, and the other satisfying requirements of the Real Estate Settlement Procedures Act, or RESPA.
The Federal Reserve has had rulemaking authority for TILA loan disclosures under Regulation Z, while the Department of Housing and Urban Development (HUD) oversees RESPA disclosures.
Lenders, the real estate industry, and consumer groups have complained that having two sets of mortgage loan disclosures is confusing.
In an attempt to address that problem, the Dodd-Frank Wall Street Reform and Consumer Protection Act transfers oversight of both TILA and RESPA to the Consumer Financial Protection Bureau in July.
The bill mandates that the CFPB issue a proposal for a single federal mortgage disclosure form that satisfies both TILA and RESPA requirements within 18 months of assuming oversight responsibility.
By the time Dodd-Frank was passed, HUD had rolled out new RESPA loan disclosure forms in the face of industry opposition, but the Fed was still in the process of overhauling TILA disclosures.
A combined TILA-RESPA disclosure rule "could well be proposed by the (bureau) before any new disclosure requirements issued by the Board could be fully implemented," the Fed said in announcing that it will not finalize three rulemaking proceedings it’s initiated since August 2009.
Although there are specific provisions of the Fed’s proposals that would not be affected by the bureau’s development of joint TILA-RESPA disclosures, adopting them "in a piecemeal fashion would be of limited benefit, and the issuance of multiple rules with different implementation periods would create compliance difficulties," the Fed said in an announcement.
The Mortgage Bankers Association welcomed the Fed’s move, saying a series of "unnecessarily duplicative rulemakings would have increased confusion, regulatory burden and costs to the very consumers these rules should protect."
In announcing plans to update TILA loan disclosures in the summer of 2009, Fed Chairman Ben Bernanke said the one-page TILA disclosure currently in use "is not adequate to convey the features and risks of today’s complex products."
The Fed promised improved disclosures would:
- Capture most fees and settlement costs paid by consumers in the disclosed annual percentage rate.
- Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit.
- 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 Fed will move forward with April 1 implementation of new rules governing loan officer compensation that are intended to prevent borrowers from being steered into higher cost loans. The rules stipulate that loan officer compensation cannot be based on a mortgage transaction’s terms.
Mike Anderson, director and government affairs chairman for the National Association of Mortgage Brokers, said mortgage brokers had difficulty obtaining guidance from the Fed on exactly how the new rules for loan officer compensation would work.
The Fed updated its guidance on the topic on Jan. 26. But Anderson, the president of Metairie, La.-based Essential Mortgage Co., called the update a "cut and paste job" that left many questions unresolved.
The Small Business Administration’s Office of Advocacy agreed, writing the Fed Tuesday to express concerns that its guidance may not meet the requirements of the Small Business Regulatory Enforcement Fairness Act.
The SBA’s Office of Advocacy said mortgage brokers had complained that the guidance "answers almost none of the questions that the industry has about the rule and view it as simply a summary of a complex issue and not guidance on how to comply with the requirements of the rule."
The Fed, SBA’s Office of Advocacy said, has a legal obligation "to provide the industry with a description of the actions needed to comply with Regulation Z in a manner specific enough that will enable a small entity to know if it has met the requirements of the rule."
