The Federal Reserve has adopted rules to give homebuyers more protection from shady lending practices that have contributed to the housing crisis-- driving foreclosures to record highs.
The board approved a plan Monday that would crack down on the type of practices that have hurt many of the riskiest borrowers. Lenders wouldn’t be able to make loans without proof of a borrower’s income.
According to a report, the plan will: bar lenders from making loans without proof of a borrower's income; require lenders to make sure risky borrowers set aside money to pay for taxes and insurance; restrict lenders from penalizing risky borrowers who pay loans off early.
Such "prepayment" penalties are banned if the payment can change during the initial four years of the mortgage. In other cases, a penalty can't be imposed in the first two years of the mortgage; prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value.
The borrower need not prove that the lender engaged in a "pattern or practice" for this to be deemed a violation.
That marks a change sought by consumer advocates from the Fed's initial proposal. It should also make it easier for borrowers to lodge a complaint.
"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities and the national economy, said Federal Reserve Chairman Ben Bernanke. "Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”
Lenders, for example, have to credit a mortgage payment to the homeowner's account on the day it is received. Brokers and others are forbidden from "coercing or encouraging" an appraiser to misrepresent the value of a home.
Consumer groups initially complained that the new rules are not strong enough, meanwhile, lenders worry they are too tough and could potentially limit mortgage options for people--making it harder for some to obtain financing.
The plan would apply to new loans made by thousands of lenders, including banks and brokers. It would not cover current loans. Those different lenders fall under a patchwork of regulators at the federal and state levels.
Fed Governor Randall Kroszner, the central bank's point person on the new rules, said the Fed's goal was to protect borrowers from unfair or deceptive practices while also not impeding the flow of credit.
The Fed's rules, he said, should "better protect consumers, while preserving their access to credit as they make some of the most important financial decisions of their lives."
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