Proposed rules to tackle predatory home loans

Friday, July 24, 2009

The Federal Reserve Board has proposed changes to Regulation Z of the Truth in Lending Act that would help protect consumers from abusive lending practices. The recommended rules are designed to improve borrower understanding of mortgage loan terms and ban certain forms of broker compensation.

"Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply," said Governor Elizabeth A. Duke.

Mortgage disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. Proposed changes would apply to closed end mortgages and to home equity lines of credit.

The Fed's proposals would:

• Include most fees and settlement costs when disclosing the annual percentage rate (APR)
• Require lenders to compare the consumer's APR to the average APR offered to borrowers with excellent credit
• Require disclosures be provided at least three business days before loan closing

For adjustable-rate mortgages, lenders would be required to show consumers how their payments might change, for example, by disclosing the highest monthly amount the consumer might pay during the life of the loan. Once the mortgage closed, lenders would have to give borrowers 60 days notice if an adjustable rate was going to change.

The Fed also proposes to prohibit mortgage loan originators from 'steering' borrowers into more expensive loans. Payments to mortgage brokers based on a loan's interest rate would also be banned.

To help protect consumers from unfair practices lenders would have to provide consumers with a one-page list of questions to ask about the loan being offered. Questions include: Can my rate increase? Can my minimum payment increase? Should I get a home equity loan or a home equity line of credit?

Consumers applying for home equity lines of credit (HELOCs) would receive a one page summary of key information and a HELOC's potential risks. Within three days of applying, consumers would receive information detailing the specific terms of that loan.

Lenders would be banned from closing a HELOC account ( for payment reasons) unless the borrower was more than 30 days late in paying.