Fed Eliminates New TILA Rule Conflict for FHA Mortgages

On the eve of new lending restrictions on subprime and higher-priced mortgages going into effect, the Federal Reserve Board has issued guidance clarifying that limitations on prepayment penalties will not apply to FHA mortgages.

Starting tomorrow, all “higher-priced” mortgages carrying annual percentage rates at least 1.5 percentage points higher than a comparable prime loan will be subject to much tougher lending requirements. These include requiring the verification of borrowers’ income and assets, prohibiting prepayment penalties except under certain circumstances, and requiring lenders to assess a borrower’s ability to repay a mortgage. In addition, the new Truth in Lending Act regulations impose a host of new restrictions on mortgage advertising.

Fed to Get into Mortgage Modification Business?

Fed Chairman Ben Bernanke announced this week that the Federal Reserve would start renegotiating the terms of mortgages it inherited from
Bear Stearns and AIG in an effort to stem the tide of foreclosures. While it wasn’t clear how many mortgages are involved, it appears the
bulk of the loans are subprime and Alt A backing non-agency mortgage securities.

It also wasn’t clear whether the Fed planned to utilize the staff of the FDIC, which has the most experience in loan modifications, to oversee the process. In a departure from most past loan modifications efforts, Bernanke indicated the Fed planned to aggressively utilize principal reductions as part of its renegotiations with borrowers. Some $50 billion worth of mortgages could be involved.