Mortgage LendersThe Fed Takes On Corrupt Lenders With New Rules and Regulations

The Federal Reserve – which regulates many lending institutions and is taking an ever-widening role in supervising financial institutions in the USA as the mortgage crisis continues – unveiled new mortgage rules this month.

For months, government officials have been hammering out the rules and regulations in an effort to tighten supervision of mortgage lenders, prevent fraud, and protect consumers from the kinds of high-risk loans that created the subprime crisis. The unveiling of the new and stronger rules sent a message of strength, integrity, and prudent oversight to the mortgage industry and was extremely timely. Just days before the new policies were announced the major mortgage lending bank IndyMac collapsed, leaving many depositors in limbo regarding whether or not they will ever again see the money they had entrusted to the thrift.

But the troubles at IndyMac appear to be isolated, and can be traced directly to the fact the company invested heavily and recklessly in the hazardous market for bad credit loans. The institution is, in fact, a spin-off and remnant of the troubled and controversial Countrywide Mortgage, whose unsavory reputation for predatory sales tactics and corrupt dealings with customers helped to cripple it last year.

Fed Chairman Ben Bernanke announced the new rules by saying that they are “intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership.” He also added that “Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers.”

Here are the main highlights and a summary of the new changes:

  • The bulk of the new regulations relate to special mortgages that charge higher interest in exchange for lending to consumers with bad credit.
  • Rules will ultimately protect bad credit customers by making it much harder for them to borrow amounts that cannot be reasonably managed and repaid.
  • Those with good credit have little to worry about in terms of qualifying for loans under the new rules, but will benefit from the fact that mortgage lenders will now be held to a higher standard of disclosure
  • The Fed also severely limited the use of prepayment penalties. Prepayment penalties are stiff fees imposed on borrowers who choose to pay off their loans early in order to save money.
  • Lenders will also have to maintain escrow accounts for property taxes and homeowner’s insurance. That will help manage those responsibilities for homeowners while also limiting the risk that could arise from forgetting to pay obligations on time or not having adequate funds to make tax and insurance payments.
  • More importantly, it will prevent fraudulent lenders from collecting money from homeowners and then failing to forward it on as promised to insurers and taxing authorities.
  • Creditors and mortgage brokers are now forbidden from pressuring real estate appraisers to artificially inflate or deflate a home’s actual value.
  • Companies that service mortgage loans must credit customer payments immediately and will have less flexibility regarding charging exorbitant late fees. They must also respond promptly to requests for itemized customer account statements.
  • Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan, including home improvement loans or mortgage refinances.
  • Until they receive the written estimate, consumers cannot be charged any fees except for a reasonable fee for doing a credit history check.
  • Lenders must also provide more disclosure and be more accurate and honest when placing advertisements for their loan products.

While these new mortgage regulations are not intended to help rescue homeowners who are already delinquent – and the rules will not go into effect until late next year – they were supported by many consumer rights groups.

Some of the strongest praise from national housing advocacy organizations was for a new rule that no longer requires borrowers who feel preyed upon to prove a pattern or practice of such illegal predatory behavior. Doing so in the courts can be nearly impossible. Now it will be much easier for borrowers to seek recourse from the justice system for wrongs lenders may have committed such as steering unwary consumers into inappropriate loan instruments.

The mortgage industry also welcomed the new regulations, because tougher oversight will help to weed out unethical or illegal lenders who have tarnished the reputation of good, reliable, resourceful professionals.

The final approval of these long overdue regulations is a positive sign. When the nation’s mortgage sector emerges from the current economic crisis and subprime meltdown it will do so as a revitalized and more respected industry. And that is encouraging news for those who want to buy or refinance a home with added confidence and fairness.

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