Federal Reserve & Interest Rates

The Federal Reserve Board of Governors has an open meeting today at which they will propose amendments to the Truth in Lending Act (TILA). Focus will be on Regulation Z of TILA, which contains most of the specific compliance regulations for lenders. The issue at hand is the warding off of abusive lending practices.

There are several amendments that are being discussed at today’s meeting. They include:

-Improving the screening process to help lenders better determine the borrower’s ability to repay loans.
-Prohibiting or limiting loans that do not require proof of income.
-Requiring lenders to ensure that borrowers have budgeted for taxes and insurance payments (especially sub-prime borrowers)
-Prohibiting penalties for prepayment on loans (for sub-prime borrowers)
-Regulate advertising, offers, and ‘teaser’ rates to limit confused or otherwise mislead borrowers.

The Board of Governors will discuss and vote on these issues at there meeting today. After public discussion, and perhaps further research, these amendments will go into effect. These adjusted regulations are being proposed in the hopes that there will be less foreclosures in the future.

At present, banks are already encouraged to work with borrowers as much as possible to avoid unnecessary foreclosures. As of today, we are still staring recession n the face. Stock market performance yesterday left much to be desired.

The President declared a mortgage freeze that will hold initial adjustable mortgage rates at the starter rates for five years. This will only affect sub-prime borrowers, and save them on interest.

The Fed is working to make sure that all borrowers fully understand the terms and conditions of their loans. Hopefully the amendments to Regulation Z will thwart abusive lending practices, and less people will have overwhelming debts that they can’t keep up with. Ultimately, the effort should help to slowly boost the economy over the long term.

Federal Reserve Board Chairman Ben S. Bernanke commented on the current United States economic outlook and the recent actions of the Federal Open Market Committee at the end of October in his testimony on November 8, 2007.

The Gross Domestic Product (GDP) grew at an average pace of nearly 4 percent during the second and third quarters.  While it is true that increases in energy prices might lead to a rise in overall inflation, core inflation has modestly improved.  Investor concerns about the credit quality of mortgages triggered some financial turmoil.  Uncertainty about developments in the housing market and a loss of confidence in credit ratings as a reliable risk assessment lead to a sharp decline in demand in this area.

Chairman Bernanke stated that “Increased investor scrutiny of structured credit products is likely to lead ultimately to greater transparency in these products and to better differentiation among assets of varying quality.  Investors have also become more cautious and are demanding greater compensation for bearing risk.  In the short term, however, these events do imply a greater measure of financial restraint on economic growth as credit becomes more expensive and difficult to obtain. “

At the latest FOMC meeting, there was evident of strong growth in employment and income gains, and therefore consumer spending.  Despite this growth, the FOMC considered the mortgage lending issues, and the data that suggested that banks had tightened terms and standards regarding credit products.

Downside risks, including failing financial market conditions and large inventories of unsold homes were contributing factors in the recent federal funds rate reduction action.  Inflation continues to be a concern for the Fed, however, in order to “forestall some of the adverse effects on the broader economy,” they decided to make another cut in the rates.

Lending practices and constantly being monitored and evaluated.  The Federal Reserve and Congress and working with the Federal Housing Administration (FHA) and NeighborWorks America to help prevent delinquency.  The Conference of State Banking Supervisors (CSBS) are also involved in assisting subprime mortgage lenders and borrowers to get loan repaid.

Bernanke stated, “We are looking closely at practices such as prepayment penalties, failure to escrow for taxes and insurance, stated-income and low-documentation lending, and failure to give adequate consideration to a borrower’s ability to repay.  Using our authority under the Truth in Lending Act (TILA), we expect that we will soon propose rules to curtail abuses in mortgage advertising and to ensure that consumers receive mortgage disclosures at a time when the information is likely to be the most useful to them.”

Hopefully, this latest rate cut move and the efforts to heal the wounded subprime mortgage market will begin the long process of stabilizing the economy.  Perhaps in a year we will have a clearer picture of what our economic outlook actually is.

If you understand how the structure of the Federal Reserve works, then you know that the Board of Governors has several advisors. It is coming to the time in the year where the Consumer Advisory Council will meet to discuss issues that pertain to you, the consumer. Later this month, on October 25, 2007, the Consumer Advisory Council will hold an open meeting to discuss to main current issues.

The first issue to be discussed is the Home Ownership and Equity Protection Act (HOEPA). This act, passed by the Federal Trade Commission (FTC) in 1994, was created to detail the rights of borrowers to make use of their home equity. Loans that are covered by the act must meet certain requirements.

The three types of loans that are covered under this act are:

1. The original property mortgage if the APR exceeds eight percentage points on Treasury securities of comparable maturity.
2. A second mortgage if the APR exceeds by more than ten percentage points in Treasury of comparable maturity.
3. All of the fees and payable points at closing; either $510 or eight percent of the total loan, which ever one is larger. Credit insurance in connection with the transaction are also included as fees.

Under HOEPA, the loan amount, the APR, the variable rate, the payment amount and the warnings concerning default are required to be disclosed in written form. All of this information must be given by the closing date.

The Truth in Lending Act (TILA) will also be discussed at the meeting. TILA is under Title I of the Credit Protection Act. It basically states that all key terms of the lending agreement, such as fees, interest rates and penalties, should be disclosed to the consumer/borrower. Credit card practices and dispute procedures are also regulated in this act.

On October 25, 2007, these issues will be brought to the table. With all of the foreclosures, and the plummeting of the subprime lending market, it is time to review consumer rights and see what might be done to help the issue. This will also be an opportunity for the public to speak on these matters. The Federal Reserve Board welcomes comments from the public during the discussion of these issues.

This meeting is open to the public, but registration is required by the 23rd of this month. You can register on the Federal Reserve Website.