Jeannine Aversa
USA Today
A foreclosure sign is seen in Antioch, Calif. The Fed unanimously endorsed rules to protect borrowers, including one to restrict lenders from penalizing bad-credit or low-income borrowers who pay off their loans early.
WASHINGTON — The Federal Reserve endorsed new rules Tuesday that would give people taking out home mortgages new protections against shady lending practices.
The proposed rules, approved in a 5-0 vote by the board, are expected to apply to new loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.
To protect subprime borrowers, those with higher-priced loans because of riskier credit histories, the Fed proposes:
• Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
• Creditors would be required to verify the income and assets they rely upon in making a loan.
• Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least 60 days before any possible payment increase.
• Creditors would have to establish escrow accounts for taxes and insurance.
Other proposed rules would apply to all loans:
• Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is a fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
• Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans would be prohibited from engaging in certain practices. For example, servicers would be required to credit consumers’ loan payments as of the date of receipt and would have to provide a schedule of fees to a consumer upon request.
“Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole,” said Fed Chairman Ben Bernanke in prepared remarks. “They have no place in our mortgage system.”
Fed policymakers also are considering requiring financial disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees — except for a fee to obtain a credit report — until after the consumer receives the disclosures.
The Fed also will consider prohibiting certain types of misleading or deceptive advertising for certain loans; It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory, or “teaser” rates.
Before taking effect, the rules must be voted on again following a period of public comment and possible revisions.
The Fed’s response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession and roiled Wall Street.
The plan, if ultimately adopted, offers Bernanke, who took the helm at the Fed in February 2006, an important opportunity to put his imprint on the Fed’s regulatory powers. Some critics have complained that Bernanke’s predecessor — Alan Greenspan, who ran the Fed for 18½ years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, where easy credit spurred lots of subprime home loans and many exotic types of mortgages.
Now that the housing market has gone bust, the carnage has been worst in subprime loans.
Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72% entered the foreclosure process during those months. At the same time, a record 18.81% of the subprime adjustable-rate loans were past due.
When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.
