The Federal Reserve Board today approved a final rule relating to home mortgage lending that is aimed at promoting more responsible lending and protecting consumers. The new rule becomes effective October 1, 2009 except for a provision imposing a new escrow requirement, which is to be phased in during 2010. In addition to prohibiting unfair, abusive or deceptive home mortgage lending practices and restricting certain other practices, the rule establishes some new advertising standards and imposes additional disclosure requirements that must be made at earlier points in the process than has heretofore been the case.
The new provisions reach all mortgage lenders, not just those supervised by the Federal Reserve. The Fed hopes that, in making the provisions more far reaching, the playing field for lenders will be leveled, and there will be more competition in the mortgage lending arena.
Four key protections for "higher-priced mortgage loans" (a new category) are established. These include:
1. Prohibiting loans from being made without regard to borrowers ability to reapy from income and assets other than the home's value. Repayment ability must be based on the highest scheduled payment in the first 7 years of the loan.
2. Income and assets relied upon to extend credit must be verified.
3. No prepayment penalites if the payment can change in the first four years (two year limit for prepayment penalties for other loans).
4. Mandatory escrow accounts for property taxes and insurance for first lien mortgage loans.
For all other loans secured by a principal dwelling of the borrower, the rule prohibits creditors and mortgage brokers from coercing appraisers to misstate values; prohibits servicers from engaging in certain practices like pyramiding late fees and requires payments to be credited as of the date of receipt; requires creditors to provide good faith cost estimates within 3 days of a loan application (currently, only required for home purchase loans; now required for home improvements or refi's).
New advertising rules require more information about rates, payments and other loan features and prohibits using the term "fixed" rate when the rate can later change.
The final rule exemplifies the continuing regulatory concern over the problems associated with the subprime lending sector's abusive practices in recent years and the Fed's determination to crack down on rogue lenders and shady practices. Virtually all loans in the subprime sector will be affected by the new rules.
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