After hammering out the details for months, the government recently unveiled tougher new rules and regulations related to the mortgage industry. They're meant to protect consumers while helping the nation avoid a repeat of the subprime mortgage crisis.

Politicians and banking officials have been in a tug-of-war about new regulations because the mortgage industry wants to salvage its tarnished reputation with a minimal amount of oversight. Congress, on the other hand, wants to send a clear message that it's on the side of the ordinary consumer and won't tolerate predatory lending practices.

The two sides managed to reach a workable compromise, and the Fed finally announced the new rules, which will have a broad impact on the mortgage industry when they officially go into effect at the end of 2009.

Bad credit mortgages

The bulk of the new regulations relate to so-called bad credit mortgages. These are loans that carry higher than normal mortgage rates because they represent a greater risk to lenders. Their inherent risk is due to the fact that they're made to consumers who've already demonstrated difficulty in repaying their debts.

The reason that the main focus of the new rules was on high mortgage rate bad credit loans rather than on lower mortgage rate prime loans is that federal regulators trace the origins of our current mortgage crisis to problems with subprime loans, which are a textbook example of high-risk bad credit loans.

New mortgage policies

Consumer advocates are praising some of the new policies. These include:

  • A drastic curtailment on the use of prepayment penalties. Lenders impose prepayment fines when borrowers pay off their loans early. Many consider them unfair because they basically punish homeowners for paying off their debts.
  • Lenders will now be required to maintain more extensive escrow accounts for property taxes and homeowner's insurance. That should help stop mortgage companies from collecting taxes and insurance payments and then fraudulently pocketing them without forwarding the payments to insurers or tax authorities.
  • Creditors and mortgage brokers who pressure appraisers into raising or lowering property valuations will now be in violation of the law and could face severe consequences.
  • Other important aspects of the new rules cover disclosures and truth in lending practices. Mortgage companies have to be more straightforward and specific, for example, when advertising mortgage rates, or providing closing cost information and payoff balances to their customers.

All these rules will ultimately protect the consumer, but many borrowers may not fully appreciate or welcome the added protection. That's because it will be harder for them to get loans if they can't prove that they're capable of paying them back in a timely and responsible manner. Those who have decent credit may not notice significant differences, but borrowers who rely upon bad credit loans are going to be held to a much higher standard.

Published on August 6, 2008