The Fed's Lending Proposal

The Federal Reserve proposed regulations yesterday designed to clean up lending practices and prevent borrowers from taking out loans they cannot afford.

High-interest-rate loans, including subprime loans, would be subject to the following rules ...
Issues Details How It Would Help
Ability to repay Lenders would be prohibited from "engaging in a pattern" of lending to borrowers who cannot afford to pay a loan at its higher reset rate. Prevents people from obtaining adjustable rate mortgages that they cannot afford after the interest rate increases.
Income verification Third-party verification of a borrower¿s income and assets would be required, with some flexibility for borrowers who are self-employed. Seeks to eliminate loans made with low or no documentation and weed out borrowers who make infl ated claims of income in order to purchase houses they cannot afford.
Prepayment penalty Prepayment penalties would expire at least sixty days before the interest rate on a borrower¿s loan is scheduled to increase. Would give borrowers more time to refi nance. Lawmakers want to eliminate prepayment penalties altogether.
Escrow of taxes and insurance Requires lenders to establish an escrow account for the payment of property taxes and insurance. Borrowers could opt out of the escrow after one year. Eliminates practice of excluding the cost of taxes and insurance, leading borrowers to think their payments are lower.
Most mortgages would be subject to the following rules ...
Issues Details How It Would Help
Broker compensation The borrower must receive written disclosure of the fees a mortgage broker will get from the loan. Once the borrower agrees to the fee, it cannot be increased even if the loan amount rises. Reduces the incentive for brokers to sell high-interest loans to unsuspecting borrowers. Lawmakers want to prohibit lenders from paying brokers a "yield spread premium" altogether.
Late fees and payoff schedules The servicer handling the borrower¿s mortgage payments must disclose all fees and payments associated with the loan. The servicer must immediately credit a borrower¿s account when the payment is received and cannot divert a borrower's principal payment to late fees, making it appear that subsequent payments are insuffi cient. Aimed at eliminating the abusive practices of loan servicers who improperly impose late fees on borrowers even when their payments were on time.
Appraiser coercion Creditors and brokers would be prohibited from coercing or encouraging an appraiser to infl ate or misrepresent the value of a home. Intended to regulate appraisers who infl ated the values of homes so brokers and lenders could increase their compensation.
Misleading ads Mortgage lenders must include and give equal prominence to both the introductory rate on a loan and its higher reset rate in advertisements. Lenders cannot market adjustable-rate mortgages as fixed-rate. Attempts to eliminate some deceptive advertising practices by mortgage lenders.
Early disclosure of costs Lenders must disclose all fees and payments the borrower will have to pay before the borrower is locked into the loan. Forces lenders to disclose the exact costs of a loan early in the lending process, allowing borrowers to comparison-shop.
Consumer recourse Consumers can sue a lender if it breaks any of the rules above. The new rules would increase the number of mortgage holders who can pursue legal recourse.

Source: Federal Reserve

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