The Fed Takes On Corrupt Lenders With New Rules and Regulations

The 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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Bill Long - July 17th, 2008 at 11:33 am none Comment author #143326 on The Fed Takes On Corrupt Lenders With New Rules and Regulations by Queercents

Of course, none of this fixes the easy-credit environment created by the Fed itself, the moral hazard created by the dispersion of credit risk through securitization, the investment-grade ratings given to these vehicles by the credit-rating agencies, or even the huge increase in mortgage fraud on the part of borrowers. I guess the Fed had to look like they were doing something other than devaluing the dollar, but this doesn’t really accomplish much. Yay for honest lending, but if you want to lay blame for the housing meltdown, you need to cast your gaze a lot wider than a couple of corrupt lenders.

Nina - July 18th, 2008 at 6:22 am none Comment author #143579 on The Fed Takes On Corrupt Lenders With New Rules and Regulations by Queercents

Bill: Point well-taken. And your comment made me want to look at the “mortgage fraud on the part of borrowers” statement. Here’s an interesting article that covers it. It could be post in and of itself:

By one estimate, total losses from fraudulent mortgage applications were estimated to be about $3 billion annuallyâ€”and growing. The deception was clearly widespread, including false statements on mortgage applications about family income and current levels of indebtedness, submission of phony documents, and lying about the intended uses of the property that was being purchased…

As more mortgages go bad and enter foreclosure, their details are coming under scrutiny, and the facts are not always pretty. They suggest that while lenders became too careless and some brokers were clearly swindlers, many borrowers were more than simply naÃ¯ve or overly optimistic; a good many were probably cheating. Any federal legislation package that provides the financing to rework millions of thousands of subprime mortgages quickly is likely to reward quite a few of these chiselers.

One place to look for the cheating is in the speculation which helped drive the market, and which has played so large a role in todayâ€™s rising default volume. Everyone, of course, decries speculators, and itâ€™s de rigueur in any speech or editorial endorsing giant bailout packages to denounce these gamblers and exclude them from any help. But as more mortgages unwind, weâ€™re discovering that not only was speculation more rampant than we thought, but that many of these gamblers were deceiving lenders and builders by hiding their intentions.

So-called â€˜occupancy fraudâ€™â€”in which a speculator claims he will live in a house he is buying when it is actually a property he is purchasing for investment purposes– accounted for about 20 percent of all mortgage swindles during the go-go years of subprime lending, according to a study by BasePoint Analytics, which specializes in detecting mortgage fraud. Buyers hid their intentions because lenders generally require bigger down payments on purchases of investment properties, and some builders will limit the number of investors they allow into a new development, because these buyers are more likely to walk away from a property when the market tanks. Home builders in hot markets were especially susceptible to this fraud because investors would purchase houses in new developments with the intent of flipping them as soon as they were ready to be occupied. Several builders told the Wall Street Journal earlier this year that while they thought that only 10 percent of their sales were to investors in recent years, in fact, it now appears that as many as a quarter of their homes were being snapped up by speculators, who often lied about their intent even when builders required them to sign documents affirming they would reside in their homes.

The level of occupancy fraud is significant because it suggests that speculation accounts for a larger part of the troubled mortgage market than most people realize. For one thing, some of the countryâ€™s highest foreclosure rates are in states which until recently had a hot, investor-driven housing market, notably California, Nevada and Florida. In fact, among the five states with the highest rates of foreclosures, defaults by known speculators (that is, those who admitted they were buying investment properties) account for more than one-fifth of all mortgages going bad. We donâ€™t know exactly how many additional defaults can be attributed to occupancy fraud, but some studies have suggested the misrepresentations were widespread. Fitch Ratings, for instance, looked at a portfolio of 45 subprime loans that defaulted within their first year and found that in two-thirds of the cases borrowers never occupied the property, though they said they intended to.

Mortgage fraud, however, doesnâ€™t stop at cheating by investors…

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The Fed Takes On Corrupt Lenders With New Rules and Regulations

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