Financial Update (Third Quarter 2008)

New Mortgage Rule Intended to Protect Consumers

photo of applicants and mortgage lender The Federal Reserve has adopted a new rule designed to protect consumers taking out mortgage loans. The rule, which becomes effective on Oct. 1, 2009, was written to prevent abusive or deceptive home mortgage lending practices. The rule amends Regulation Z, the Truth in Lending Act, and was adopted under the Home Ownership and Equity Protection Act.

Rule addresses categories of mortgage loans
The new rule falls into three broad categories: rules concerning higher-priced loans (such as subprime loans, which carry a higher interest rate), those applying to closed-end mortgages (which prohibit early payment of principal), and guidelines applying to all mortgages.

The protections for higher-priced loans include

  • prohibiting a lender from making a loan without considering a borrower's ability to repay from income and assets other than the home's value;
  • requiring lenders to verify income and assets when considering a borrower's repayment abilities;
  • requiring creditors to establish escrow accounts for payment of property taxes and homeowner's insurance; and
  • banning prepayment penalties if the buyer's payment can change in the initial four years (for other higher-priced loans, a prepayment penalty cannot last for more than two years).
Press releaseoff-site image
Highlights of the new rulesoff-site image
Chairman Bernanke's statementoff-site image
Gov. Kroszner's statementoff-site image

Rules for closed-end mortgages include prohibitions against failing to promptly credit a payment to a consumer's account and against encouraging an appraiser to misrepresent the value of a home. For this type of mortgage, a creditor must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for a mortgage loan secured by the consumer's principal dwelling.

For all mortgages, lenders' advertisements will be obligated to include information about rates, monthly payments, and other loan features.

Consumers to receive information up front
Lenders will also be prohibited from representing a rate as fixed when in fact it can change. The rules also require that certain disclosures about the transaction being entered into be given to consumers earlier in the mortgage borrowing process.

These rules will apply to all lenders, not just those supervised by the Federal Reserve.


July 30, 2008