The Federal Reserve has proposed a new set of lending regulations designed to help protect borrowers. In an effort to tighten up some of the questionable lending practices that are being blamed for much of the current credit crunch, the Fed is calling for stricter guidelines for mortgage lenders.
The Fed’s proposal, made on December 18, is slated for approval after a 90-day period for public comment. And, while some finance industry officials have criticized the initiative for providing too little, too late, most view it as a step in the right direction.
To help prevent some of the problems associated with higher-priced subprime loans, the Fed wants the new rules to:
Prevent approvals based on low introductory rates. Lenders would no longer be allowed to grant subprime mortgages to those who only qualify for a temporary low initial interest rate. Instead, lenders would be required to ensure that borrowers taking out loans that are scheduled to eventually reset at a higher rate would also be able to meet these future, larger payments.
Require or encourage escrow accounts for subprime loans. In order to help borrowers stay on top of all of the payments required when owning a home, lenders would be required to start collecting property taxes and home insurance along with mortgage payments and holding them in escrow until they are due.
Restrict “stated income” subprime loans. To better ensure that homebuyers can truly afford the debt they’re taking on, lenders would no longer be allowed to provide mortgages without verifying a borrower’s income and assets.
Limit prepayment penalties. To provide subprime borrowers with the option of being able to refinance into a more affordable loan without being hit with stringent penalties, the Fed wants to restrict prepayment penalties and make sure that any such penalties expire 60 days prior to a loan resetting.
And, in the case of most mortgages, along with a few other general ethical guidelines, the new regulations propose to:
Require earlier disclosure forms. Recent studies found that many borrowers weren’t aware of all of the potential risks involved when they signed for non-conventional loans. The Fed wants lenders to be required to provide Truth-In-Lending mortgage disclosure forms to borrowers early enough to allow for review when shopping for a mortgage.
Have mortgage brokers disclose incentives. Some brokers earn a commission based upon selling customers a mortgage with a higher interest rate than they’d normally qualify for. Requiring that this be revealed to loan applicants could help prevent customers from being misled.
By promoting more responsible lending practices, the new rules may help protect borrowers in the future. However, it’s always important to make sure you fully understand the terms of any loan you are considering. You can find information to help you navigate the loan process in the LendingTree Smart Borrower Center.