While consumers will are sure to benefit from recent changes enacted by The Federal Reserve, will the new lending rules put the squeeze on home sales? The changes amend Regulation Z, Truth in Lending, and are “intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting home ownership.”
The rules will now affect all mortgage lenders, not just state-chartered institutions, as was the case under the old system, and offer protections to those with weak credit. Establishing a new category called “higher-priced mortgage loans,” those first-lien mortgages with an annual percentage rate 1.5% or more above an “index” of average prime rate offers. The rules will also cover those subordinate lien mortgages, with an annual percentage rate of 3.5% above the index.
There are four key provisions in the regulations which will:
Prohibit lenders from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
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.
Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.
The rules also address deceptive advertising practices by lenders; actions that encourage inflated appraisals; and abusive fees from loan servicers.
Set to take effect on October 1, 2009, with the exception of the escrow requirement, the new rules will offer some needed protections for the majority of consumers, but may actually limit the ability of some to obtain a mortgage. Not all “sub-prime” loans of recent years were fraudulent; and many whose income is difficult to verify—self employed, servers in restaurants, and others—will find it difficult or impossible to obtain mortgages under the new rules. We can only hope the benefits of these new regulations outweigh the deficiencies.
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