New consumer protections on mortgages from the Fed Reserve

Dennis Norman

There have been numerous stories over the past year or so about borrowers finding themselves trapped in mortgages that have terms that have proven not to be favorable to them or their situation.  In many instances borrowers were lured in to their mortgage by a “teaser” or low initial interest rate; little or no cash needed for down payment or closing costs; or being able to afford a higher priced home as a result of reduced mortgage payments through an interest-only or other exotic type loan.  At other times, the borrower may have just simply not understood all of the terms and provisions of the loan, including perhaps expensive pre-payment fees or not so favorable interest rate calculation methods on adjustable rate mortgages. 

In an effort to address some of these issues and to make shopping for a mortgage easier while protecting the borrower, the federal government has added some new consumer protections when it comes to home mortgages.  These new protections are a mix of prohibited lending practices and new disclosures with the goal of increase the likelihood that people will find a fair mortgage they can afford and not be hit with surprises down the road.

The Federal Deposit Insurance Corp (FDIC) offers the following overview:

Lending practices prohibited as unfair, deceptive or abusive: “The new rules recognize that disclosures alone can’t always protect mortgage borrowers from the harm caused by unfair and abusive lending practices,” said Mira Marshall, an FDIC Section Chief specializing in consumer issues. “Now some specific, clear prohibitions will help safeguard consumers.”

The Federal Reserve Board adopted the following prohibitions for mortgages made on or after October 1, 2009:

• For home mortgage loans (not including home equity lines of credit), the new rules will prohibit mortgage lenders and brokers from coercing or encouraging a real estate appraiser to misrepresent the value of a home. “That’s intended to ensure the integrity and accuracy of an appraisal, so that a consumer is not overpaying for a home or borrowing more money than the home is worth,” explained Glenn Gimble, an FDIC Senior Policy Analyst.
• In addition, mortgage loan servicers (companies that collect mortgage payments and perform other duties for lenders) will be prohibited from engaging in a variety of unfair actions. One is the failure to credit a consumer’s loan payment on the date it is received. Another is deducting a late-payment fee from a loan payment without informing the borrower and thereby creating a shortage that triggers additional fees for the borrower, month after month, even when the next loan payments arrive on time.
• For high-priced and otherwise high-cost mortgages — those with a relatively high interest rate typically because the applicant is considered a subprime credit risk— the Fed’s rules contain several protections. In particular, a lender is prohibited from making a higher-priced loan (as defined in the rules) without regard to a borrower’s ability to repay from income and assets other than the home’s value.
• Lenders of higher-priced mortgages also will be required to verify a loan applicant’s income and assets using reliable, third-party documents and not based on the word of the borrower. In certain cases, the lender cannot impose a prepayment penalty if the borrower pays a loan off early.

Note: Consumers who only qualify for a high-cost, subprime mortgage may wish to consider waiting until their financial situation improves before getting a loan and buying a home. “Homeownership is costly, so even if you can afford a higher-cost mortgage right now, you might be better off waiting until you can save more money, pay off some bills, improve your credit score and buy a house you’re sure you can afford,” said Marshall. “But if you must get a mortgage, at least now you have some protection against getting in too far over your head.”

New requirements for early disclosure of loan terms and costs: In general, the rules — some from the Fed and others from the U.S. Department of Housing and Urban Development (HUD) — ensure that consumers receive “good faith estimates” of the costs of a mortgage earlier in the application process and that the disclosures better explain the costs and terms of a loan. The disclosures will cover areas such as the potential for mortgage payments to go up, any penalty for paying off the loan early, and any fees paid by the lender to a mortgage broker for bringing in someone’s business. Other rules relate to advertising and required consumer disclosures for home equity loans.

The Fed’s rules focus on the disclosure of the costs and terms of a loan. These new rules mostly implement the Mortgage Disclosure Improvement Act of 2008, which amended the Truth in Lending Act. They took effect July 30, 2009, and include these requirements:

• Lenders will continue to be required to provide early disclosures to consumers for loans to purchase a primary residence, but now they also must do so for mortgage refinancings, home equity loans (but not home equity lines of credit) and mortgages used to purchase any home, such as a vacation home or second home.
• At least seven business days must pass between when a lender delivers or mails the early disclosures to a consumer and when the mortgage is consummated (the loan closing).
• If the Annual Percentage Rate or APR (the cost of the loan expressed as a yearly rate, including interest and certain fees) increases by a certain margin above what was previously disclosed, the consumer must receive a corrected disclosure at least three business days before the loan closing.
• With one exception, a lender cannot charge any fee in connection with an application until after the consumer has received the early disclosures. The exception is a fee to obtain the consumer’s credit report.

HUD’s rules, which will go into effect January 1, 2010, require lenders and mortgage brokers to use the same form to provide good faith estimates of settlement costs and disclosures of key loan terms. The rules also include changes to HUD’s “uniform settlement statement” (often called the HUD-1 form) that will make it easier for consumers to compare the early, estimated costs to the actual costs to be charged. In addition, HUD’s rules limit how much actual costs can increase above the estimates. HUD said its new rules are expected to save the typical borrower nearly $700 at closing.

New advertising standards for mortgages: Starting October 1, 2009, the Fed’s rules will ban several advertising practices that the agency found to be deceptive or misleading.

• First and foremost, the rule prohibits any advertisement from indicating that a rate or payment is “fixed” when it can change. Also, for home equity lines of credit, if an advertisement mentions a minimum payment — which may result in a large, lump-sum “balloon payment” due at the end of the loan term — the ad must state that fact with equal prominence and in close proximity to the minimum payment information. The new rule also requires advertisements to show all interest rates or payment amounts with equal prominence and in close proximity to any low promotional or “teaser” rate or payment.

Mortgage loan originators will be subject to new federal registration requirements. The federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the SAFE Act) requires mortgage loan originators — including loan officers at financial institutions and independent mortgage brokers — to register with the government and enter information about their background and disciplinary history into a central database that consumers can access. The SAFE Act is intended to enhance consumer protections and reduce fraud in the residential mortgage industry.

Registration of state-licensed mortgage loan originators (primarily independent brokers) has already begun. The registration process for federally regulated mortgage originators (such as loan officers at banks and credit unions) and the database that will accept federal registrations are under development.

In addition, the law requires all state governments to have licensing and minimum education requirements for the mortgage loan originators they regulate, which primarily includes independent mortgage brokers.

Final bit of advice from me:

If you don’t fully understand the loan you are getting or all of its terms, get advice before going further.  You can find help from a trained, reputable housing counselor for no charge or a small fee. Find one through groups such as NeighborWorks America (www.nw.org) or by calling 1-888-995-HOPE (4673). Or, for a referral to a local HUD-certified counseling agency, visit www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm or call 1-800-569-4287.

Related posts:

1. Fed Reserve proposes significant changes to provide new consumer protection for home-secured credit
2. New disclosure requirements and protections for borrowers go into effect July 30, 2009
3. New Rule Proposed to Protect Seniors Obtaining Reverse Mortgages
4. New Rules for Mortgage Transfers
5. New Rules Announced to Protect Mortgage Borrowers