Fed Proposes Rules to Protect Borrowers

August 2nd, 2009

Directors and investors of companies that originate mortgages or make home equity loans will be interested in rules proposed by the Federal Reserve Board on July 23rd. These proposed rules are designed to protect borrowers against certain kinds of lending practices that may have contributed to the initial stages of the financial crisis.

The Fed’s proposed rules would require lenders to:

  • Provide additional disclosures to mortgage applicants and home-equity loan applicants, including a one-page Q&A document explaining risky features of a loan (such as balloon payments in adjustable-rate mortgages), a revised annual interest rate that includes most fees and costs, and a graph showing borrowers how their rates compare with rates of borrowers with excellent credit.
  • Provide clearer information to loan applicants about costs, including costs of title insurance.
  • Notify borrowers of home-equity loans 45 days before changing the terms of a loan.
  • Prohibit the making of side payments (known as yield-spread premiums) to mortgage brokers or loan officers in exchange for steering borrowers to higher-cost or riskier loans.

Consumer advocates say the proposed rules are long overdue. It has been over two years since Wall Street witnessed the first signs of strains from the subprime crisis. That crisis began in June 2007 when several hedge funds began to report losses related to the subprime mortgage market. Since then, the Fed has undertaken a comprehensive project to review the rules for home-secured credit. The proposed rules would amend Regulation Z, Truth in Lending. They have been exposed to consumer testing and are open for a 120-day comment period.

Notwithstanding the review and field testing, the proposed rules are not a certainty because the Obama Administration has proposed the transfer of the Fed’s authority for consumer protection to a new regulatory agency. But some companies may wish to implement these reforms voluntarily as best practices.

The Fed’s press release and related information is available at www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm.

Copyright © 2009 Center for Financial and Accounting Literacy

Entry Filed under: Governance

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