New Consumer Mortgage Protections Due Soon

Mortgage rules are about to change, with new consumer protections going into effect on Oct. 1.

The new rules - being enacted by the Federal Reserve - are designed to help ensure that consumers have a better idea of what the terms of a particular mortgage loan will cost them, and help them avoid being steered into unnecessarily costly loans. They're part of a series of new rules that the Fed and Department of Housing and Urban Development are putting into effect to protect consumers from abusive lending practices.

Among the most significant of the new rules are several affecting high-interest rate loans, the type usually taken out by subprime borrowers and which were widely implicated in the collapse of the mortgage-backed securities market last fall. The new rules prohibit lenders from issuing any of a number of types of more costly mortgages without regard to the borrower's ability to pay.

Income, assets must be verified

Under the new rules, lenders must verify a borrower's income and assets through reliable sources before issuing such loans, instead of simply relying on the value of the home securing the loan to protect their investment. When home prices were rising, some lenders made risky loans with little regard for the borrower's ability to pay because it was assumed the value of the home securing the loans would cover any losses, setting up many borrowers at risk of default.

The new rules also prohibit mortgage loan prepayment penalties for paying off a loan early in many instances and restrict certain practices by mortgage servicers that have drawn consumer ire. Among these is not crediting a borrower's payment on the day it was received, resulting in late fees, and failing to inform a borrower that late payment fees were deducted from a payment, triggering further penalties the following month.

The new rules also crack down on lenders and brokers who collaborate with real estate appraisers to misrepresent the value of a property, which can result in a consumer paying too much for a home or borrowing more than the property's true value. The rule expands upon the appraisal guidelines of the Home Valuation Code of Conduct previously adopted by Freddie Mac and Fannie Mae, and which affect about 80 percent of all U.S. mortgages.

Limits on advertising

Several misleading advertising practices will be banned as well, come Oct. 1. Loans cannot be advertised as "fixed-rate" if they can change at some point - such as adjustable rate mortgages advertised at a "fixed rate" for five years before resetting to a higher rate. Also, advertisements for home equity loans that feature a lump-sum "balloon payment" must prominently state that fact. Other restrictions require fuller disclosure of the true costs involved in "teaser" rate loans.

Other rules that went into effect July 30 require lenders to more fully disclose the terms and costs of any mortgage loan, and limit the fees lenders can charge upon application and before the lender has received Truth in Lending disclosures. Other rules, by the U.S. Department of Housing and Urban Development, mandating more simplified cost disclosures go into effect Jan.1.

ref: mortgageloan.com/new-consumer-mortgage-protections-due-soon-3460