Fed Announces New Mortgage Rules to Protect Consumers
New rules designed to prevent loan originators from steering borrowers into more costly mortgages in order to increase their own compensation have been issued by the Federal Reserve.
The Fed also issued temporary rules requiring that borrowers be informed how their mortgage rates and payments may vary over time, and proposed new rules establishing enhanced consumer protections and disclosures on reverse mortgage products.
The various rules, announced today, amend or would amend regulations implementing the Truth in Lending Act. The proposed rules would also implement portions of the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act.
Ban on steering borrowers into higher-cost mortgages
The final rules announced today specify that a loan originator, such as a broker or loan officer, may not be compensated based on the interest rate or terms of a mortgage he or she arranges for a borrower. They also prohibit a loan originator from being paid by both the borrower and a lender or other party when originating the loan.
The new rules are intended to prevent originators from steering borrowers into higher-cost loans that are not in the borrowers' best interest in order to increase their own compensation. Originators may still be compensated based on the loan amount, which is a common practice. The rules will take effect April 1, 2011.
New disclosures on ARMs
Newly issued interim rules require that lenders disclose how mortgage payments can change over time on loans with variable rates or payments. The rules require that borrowers be informed of the maximum rate they may be charged over the first five years of the loan, as well as a "worse-case scenario" of the highest rate and payments that may incur over the life of the loan. They must also be informed that refinancing a loan may not enable them to avoid higher payments.
Lenders must apply the interim rules to any mortgage applications received on or before Jan. 30, 2011. The Fed is also soliciting comment on the interim rules for 60 days prior to considering adoption of a final rule.
Enhanced disclosures, protecions on reverse mortgages
The proposed rules issued today deal mainly with consumer protections on reverse mortgages, including that borrowers may not be required to purchase other financial products as a condition of being approved for a reverse mortgage. The provision responds to complaints that some borrowers have been required or pressured to purchases annuities, life insurance or similar products as part of obtaining a reverse mortgage.
Other proposed rules would require that consumers participate in credit counseling before obtaining a reverse mortgage and seek to ensure that advertising for reverse mortgages contain accurate information. They would also seek to ensure that consumers are aware of their right to rescind certain mortgage transactions.
The rules respond to concerns over reverse mortgages, which are a type of home equity loan that allows older homeowners to borrow against their home equity without having to pay it back as long as they own the property. Because they tend to be fairly complicated financial products, there are concerns that some senior citizens may be taken advantage of in reverse mortgage transactions.
There will be a 90-day period for public comment on the proposed rules following their publication in the Federal Register, which is due to occur shortly, before they can be finalized.