New mortgage rules governing the practices of mortgage lenders have been adopted and will go into effect about 18 months from now. They promise to protect consumers in ways that are long overdue, while simultaneously safeguarding the nation against a repeat of the subprime mortgage crisis.

For many months, government officials and representatives of the mortgage industry have engaged in a protracted debate as they struggled to come up with new mortgage lender regulations. Meanwhile, millions of new homeowners have entered into foreclosure, and mortgage troubles have spilled into every sector of the economy. As a result, the final version of the rules and regulations is, in many ways, too late to help Americans navigate the current mortgage crisis. But the rules-which go into effect in October 2009-should offer much better consumer protection.

Tough craftsmanship

Before revisions, the originally proposed rule changes did little more than ask mortgage lenders to police themselves, despite evidence that some were acting like predatory bandits. But the final version is much more stringent and has been widely embraced as balanced, strong, and wisely crafted.

The main premise of the new rules is to encourage more conservative underwriting by mortgage lenders. Compared to the conspicuous lack of prudent underwriting within the last several years, anything would have been an improvement. But the new policies do have some powerful teeth, especially in regard to subprime borrowing, lender disclosures, and prepayment penalties.

Highlights of lender restrictions

Here are few of the main points:

  • Under the new rules, lenders will be required to provide a written good faith estimate of mortgage costs within 72 hours, even for home improvement loans or mortgage refinances. Deceptive advertising language by mortgage lenders will also be significantly curtailed.
  • Mortgage lenders are explicitly forbidden from tampering with the work of real estate appraisers by pressuring them to raise or lower home values. The use of prepayment penalties is also substantially limited; this is to protect those who want to pay off mortgages early.
  • Rules regarding escrow accounts will help ensure that payments go to insurance companies and tax offices in a timely manner. Other regulations state than when a consumer makes a mortgage payment, it has to be credited to her account immediately.

These rules especially target high-cost loans, or those that carry exceptionally hefty fees and interest rates, which are made to borrowers with bad credit. Before approving these mortgages-many of which are classified as subprimes-lenders must verify that borrowers have adequate income and assets to repay them. While this will protect consumers, it will also make it harder for those with poor credit to get mortgages.

One of the most important changes is one that says that borrowers who are victimized by predatory lenders and seek recourse through the courts no longer need to prove a pattern of illegal behavior. That can be nearly impossible to do, so the new rules will make it considerably easier to take legal action against unscrupulous mortgage lenders.

    Published on August 11, 2008