New Federal Reserve Rules for Home Mortgage Loans

Last July the Federal Reserve approved final rules regarding home mortgage loans that took effect October 1, 2009. The rules are designed to better protect consumers by facilitating responsible home mortgage lending by banks, mortgage companies and mortgage brokers… something that wasn’t done during the go-go years of the housing bubble.

The final rule amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA). New rules include the following:

1. On “higher priced mortgage loans,” new rules prohibit a mortgage lender from making a mortgage loan without regard to the mortgagee’s ability to repay the home loan. Imagine that - the government has to create a rule to insure mortgagors make home mortgage loans that borrowers can repay.
2. Mortgage creditors have to verify a borrower’s income and assets to help determine if the borrower has the ability to repay the mortgage.
3. Prepayment penalties are banned if the mortgage payment can change in the initial four years of the loan.  For other higher-priced mortage loans, a prepayment penalty period cannot last for more than two years.
4. Starting sometime in 2010, mortgage creditors have to establish escrow accounts for property taxes and home owner’s insurance for all first-lien mortgage loans.

Other rules that govern a home mortgage loan that is secured by a borrower’s principal home of any loan amount include the following:

1. Mortgage lending institutions and mortgage brokers are prohibited from having a real estate appraiser misstate a home’s value. This is another basic home mortgage principle that was blatantly ignored during the housing bubble.
2. Companies that service home mortgage loans are not allow to engage in certain practices, such as pyramiding late fees. Also, mortgage servicers are required to credit a mortgage payment as of the date they receive the payment. They also have to provide a mortgage payoff statement within a reasonable time.
3. Mortgage creditors must provide a good faith estimate of loan costs within three days after a consumer applies for any home mortgage secured by a consumer’s principal dwelling. This includes a schedule of payments, a home improvement loan or a mortgage refinance. Early cost estimates were already required for mortgages on a home purchase. 
4. Mortgagees cannot be charged any fees until after they receive the early disclosures, except a reasonable fee for obtaining the borrower’s credit history.

New mortgage rate advertising standards include additional information about mortgage rates and monthly mortgage payments.  The final rule also bans seven deceptive or misleading advertising practices, including representing that a mortgage rate or mortgage payment is “fixed” when it can change.