On July 30, 2008, the Board of Governors of the Federal Reserve Board (the "Board") published a final rule amending Regulation Z.  The final rule, the main provisions of which do not become mandatory until October 1, 2009, is available here.  The stated goals of the final rule are: (1) to protect consumers from unfair, deceptive and abusive lending and servicing practices; (2) to improve mortgage advertising; and (3) to provide consumers with disclosures early.

A highlight of the final rule is the creation of a new category of subprime loans called "higher-priced mortgage loans."  A higher-priced mortgage loan is defined by reference to an index to be published by the Board called the "average prime offer rate."  The Board will derive the applicable average prime offer rate for various loan types based on the Primary Mortgage Market Survey conducted by Freddie Mac.  The proposed methodology expected to be used by the Board in deriving average prime offer rates is available here.  A higher-priced mortgage loan will be one in which the APR exceeds the index by 1.5 percentage points or more (for first lien loans) or 3.5 percentage points (for junior lien loans).  Higher-priced mortgage loans will be subject to a number of restrictions and prohibitions, including but not limited to the following:

• creditors must verify the borrower's repayment ability before making a higher-priced mortgage loan;
• creditors must verify the assets or income it relied on in approving the higher-priced mortgage loan using reasonably reliable third-party documentation;
• prepayment penalties are prohibited entirely on any higher-priced mortgage loan where the payment can change during the first four years following consummation; prepayment penalties are limited to two years on any higher-priced mortgage loan where the payment is fixed for at least the first four years following consummation; and
• creditors must establish an escrow account for the payment of property taxes and homeowners' insurance on a higher-priced mortgage loan, repayment of which is secured by a first lien on a borrower's principal dwelling; creditors may offer a borrower the opportunity to cancel the escrow after the first 12 months following consummation.

We will be writing more about higher-priced mortgage loans and other aspects of the Regulation Z amendments in the near future.  In the meantime, please contact DocMagic, Inc.'s Compliance Department if you have any questions or comments.