New Mortage Lending Rules

This week the Federal Reserve board has taken a welcome step to ensure much needed consumer protection in the mortgage marketplace. The Federal Reserve Board has approved several new rules regarding lending practices. While these rules come a little late for some homeowners, ultimately they will help guide lenders to more fair and ethical practices.


The new rules for home mortgage loans, from the Federal Reserve Board, do the following:

* Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."

* Require creditors to verify the income and assets they rely upon to determine repayment ability.

* Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.

* Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.


In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer's principal dwelling, regardless of whether the loan is higher-priced:

* Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.

* Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.

* 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 secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.