This memo is a reminder to all Residential Mortgage Lenders of Regulation Z’s new requirements for “Higher Priced Loans”. A “Higher Priced Loan” is defined under Reg. Z as “a consumer credit transaction secured by a consumer’s principal dwelling with an annual percentage rate (APR) that exceeds the average prime mortgage offer rate for a comparable transaction as of the date the interest rate is set by:
1.5% or more percentage points for loans secured by a first lien on a dwelling, or
3.5% or more percentage points for loans secured by a subordinate lien on a dwelling.”
To determine if a loan is “higher priced”, lenders may use the calculation tool at www.ffiec.gov/ratespread/newcalc.aspx.
If the loan is “higher priced”, certain additional consumer protections under Reg. Z have been implemented:
1. Consumer’s Ability to Repay and Verification of Income and Assets- The final Reg. Z rule prohibits lenders from making “higher priced” loans without regard to the borrower’s repayment ability. Lenders must confirm repayment ability by examining current and reasonably expected income, employment, assets and other collateral, current obligations and mortgage-related obligations such as property tax and insurance payments. The new Reg. Z rule provides a “presumption of compliance” if the lender can show that: 1) it confirmed the consumer’s ability to repay through tax forms, payroll receipts, financial records or other third party documents and 2) it analyzed the consumer’s repayment ability using the largest payment of principal and interest scheduled for the first 7 years of the loan.
2. Escrow Requirements for “Higher Priced” First Lien Mortgages- For applications received after April 1, 2010 (for site built homes) or October 1, 2010 (for manufactured homes), if the loan is “higher priced” and will be a first lien, Reg. Z requires lenders establish an escrow account for property taxes and insurance. Lenders may allow the borrower the opportunity to cancel the escrow account after 12 months.
3. Prepayment Penalties for “Higher Priced” Loans Significantly Restricted
If you have any questions or concerns regarding “higher priced” loans, please feel free to contact either Morton Baird, Karen Miller or Kim Selsor at (210) 828 5844.
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