Below are the highlights of the new rules put forth by the Fed in their effort to clean up the mortgage industry.
First off, the proposal would establish a new category for most subprime loans referred to as “higher-priced mortgages.”
These are defined as loans whose APR exceeds the yield on Treasury securities of comparable maturity by at least three percentage points for first mortgages, or five percentage points for second mortgages.
For these types of loans, the following new rules would apply:
– Mortgage lenders would be prohibited from engaging in a pattern or practice of lending without considering the borrowers’ ability to repay the loans from sources other than the home’s value.
– Lenders would be prohibited from making a loan without verifying income or assets.
– Prepayment penalties would be restricted to loans that meet certain conditions, including the condition that the prepay expire at least 60 days prior to any possible payment increase.
– Lenders would be required to establish an escrow account for the payment of property taxes and homeowners insurance, and may only offer the borrower the opportunity to opt out of the escrow account after one year.
And for these and most other mortgages:
– Lenders would be prohibited from paying mortgage brokers “yield spread premiums” that exceed the amount the borrower had agreed in advance the broker would receive.
– Certain servicing practices would be prohibited, including failure to credit a payment to a consumer’s account when the servicer receives it, failure to provide a payoff statement within a reasonable period of time, and “pyramiding” late fees.
– Creditors and brokers would be prohibited from coercing or encouraging an appraiser to misrepresent the value of a property.
– Seven misleading or deceptive advertising practices for closed-end loans would be prohibited, including using the term “fixed” to describe a rate that is not actually fixed. And all applicable mortgage rates or mortgage payments would also need to be disclosed in advertisements with the same prominence as introductory or “teaser” rates.
– And finally, truth-in-lending disclosures would need to be given to borrowers early enough to use while shopping for a mortgage, and lenders could not charge fees until after the consumer receives the disclosures, unless its a fee to obtain a credit report.
Initial reactions weren’t great. Senator Christopher Dodd called the proposal “deeply disappointing,” while David Wyss, chief economist at Standard & Poor’s, called the limitations “almost irrelevant.”