People have been wondering when, and if, the Federal Reserve would take stronger action to protect borrowers hit hard by the housing and credit crisis. The Associated Press expects new rules to be released Tuesday that would apply to all types of lenders, including banks and brokers. You may wonder what gives the Fed the right to issue these new regulations. While the Fed primarily focuses on the health of financial institutions, it also plays a lead role in two key consumer protections -- the Credit Protection Act (which includes Truth in Lending Disclosures) and the Consumer Leasing Act. In recent years it's been a wild, wild west out there as money flowed freely and a lot of loans were made that helped brokers make money more than they helped consumers find good financing options.
Rules expected to be proposed Tuesday include:
- Barring lenders from penalizing subprime borrowers who pay off loans early. Often there is a $12,000 or more penalty for early repayment on subprime loans. I know people who could qualify for prime loans with lower rates but who are stuck with subprime loans because of a particular loan program that sounded good initially but is now beyond what they can afford. Yes they made a mistake, but paying $12,000 in penalties seems steep to me if someone wants to refinance to get out of a loan their broker steered them to.
- Requiring lenders to set aside money for taxes and insurance, especially for subprime borrowers. Today, while most prime borrowers have escrow accounts to pay taxes and insurance, many subprime borrowers do not. It made it easier for the broker to qualify the subprime borrower based on income. Many subprime borrowers are buying their first home and are not fully aware of the total cost of property taxes and insurance or do not have the budgeting skills to be sure to put the money aside. I'm sure some will say "then don't lend to them if they don't know enough," but if brokers held back loans for everyone who didn't know how to budget, there would be a lot fewer loans financed today.
- Restrict loans that do not require proof of a borrower's income. This will likely make it more difficult for people who are self-employed, but these loans are more commonly known as "liar's loans" and some restrictions do need to be in place.
- Examining lenders' failures to consider a borrower's ability to repay a home loan. No details yet about how this examination would work, but improvement is definitely needed here.
- Improving financial disclosure to be sure people are getting the most useful information about the terms and conditions of their mortgage. Many people don't find out about the full cost of prepayment penalties until they are ready to refinance. Some don't even know those penalties exist at closing. Most don't know about the hefty payments their brokers receive for steering them to subprime loans and how much that loan will cost them versus a prime loan.
- Curtailing abuses in mortgage advertising. Yeah we've heard that before. Wonder what else they want to do?
Federal Reserve Chairman Ben Bernanke seems more willing to step on some lenders' toes to give a bit more protection to borrowers, but he did tell the Associated Press, "We have an obligation to prevent fraud and abusive lending. At the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers."
Yes, finding that happy medium may be rough. But if the Fed doesn't do it, Congress will definitely step in and the lenders may be sorry they didn't try to deal with the Fed. I'm sure Congress's steps will be much rougher on the lenders.
Lita Epstein has written more than 20 books including The Complete Idiot's Guide to the Federal Reserve.
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Reader Comments (Page 1 of 1)
12-19-2007 @ 9:13PM
agdathome said...
the fed does not know the real problems in the mortgage biz
2-12-2008 @ 6:10AM
Ronald Crawford said...
Are there new rules that would allow people in danger of losing their home and property to utilize their tax sheltered retirement plans to pay off a part or whole mortage without paying the 10% early withdrawal and 20% tax burden?
This is different the hardship rules or 1st time home buying.