Federal Reserve’s New Mortgage Lending Rules Go Into Effect October 1st
Sep 28th, 2009 @ 4:04 PM by Debbie Dragon
New rules to protect consumers from problem mortgages adopted by the Federal Reserve go into effect on October 1st. Individual states have adopted numerous laws to protect consumers, but the federal government is looking to prevent future problems like our current home foreclosure crisis by getting involved, as well. The new rules require mortgage lenders and brokers giving borrowers with weak credit to have more diligence. Home loans designed for people with weak credit are typically 1.5 percentage points higher in interest than the average prime mortgage rate.
These rules were finalized in July of 2008, and prevent lenders from lending money to borrowers without verifying that the borrower can repay the loan conventionally and not just through a foreclosure sale as was common during 2003 to 2006. Subprime lenders allowed many borrowers to obtain mortgages without proving their ability to keep up with monthly payments, and often without even making a down payment on the purchase of the home.
New regulations will combat many of these subprime loans. They will also make it difficult for individuals who cannot fully document their income, like people who receive cash payments or restaurant waiters who receive tips as a large portion of their income, for example. The new regulations also do not cover adjustable-rate mortgages (ARMs), which allow borrowers to choose from several monthly payment options during the early years of the mortgage. The problem with ARMs is when borrowers select the minimum-payment option as it rarely covers the loan’s monthly interest charges.
According to the Federal Reserve,
The final rule adds four key protections for a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling. For loans in this category, these protections will:
Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
Require creditors to verify the income and assets they rely upon to determine repayment ability.
Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.
“These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system,” said Governor Randall S. Kroszner.
While there is a considerable amount of support for the new lending rules, there are a number of concerns. In an article on the NY Times, the president of the National Association of Mortgage Brokers based in Virginia, Jim Pair, was quoted as saying:
“We’re going to have some consumers who are not able to purchase a home because of this, since most lenders don’t want to do high-cost loans.”
Debbie Dragon is a full time freelance writer and the co-owner of ReliableWriters.com.
- Posted in Bad Credit Home Loans, Mortgages
- Permalink
- 2 Comments »
Hey There. I discovered your blog using msn. That is a really smartly written article. I will be sure to bookmark it and come back to read more of your helpful info. Thanks for the post. I will certainly comeback.
Simply desire to say your article is as surprising. The clarity on your put up is just excellent and i can assume you’re a professional on this subject. Well along with your permission let me to seize your RSS feed to stay updated with imminent post. Thank you 1,000,000 and please carry on the rewarding work.