The Fed approved some new measures Monday meant to crack down on what they deem to be deceptive lending practices. Because most of these problems have already worked themselves out, thanks to the whole credit crisis thing going on, these measures likely will have little impact. But just for fun, let’s take a look at what the changes are.
The following summary was collected from the San Francisco Chronicle:
Rules for all mortgages
- Prohibit creditors and mortgage brokers from coercing appraisers into misstating a home's value.
- Require additional information about rates, monthly payments and other loan features in all advertising.
- Ban seven deceptive or misleading advertising practices, including calling a rate or payment "fixed" when it can change.
New lending rules
- Force lenders to consider a borrower's ability to repay loans from income and assets other than the home's value.
- Require lenders to document a borrower's income and assets.
- Ban penalties for borrowers who pay off loans early if the payment can change in the first four years. In certain cases, a prepayment penalty period can't exceed two years.
- Mandate that creditors ensure certain borrowers set aside money to pay for property taxes and insurance by establishing escrow accounts.
The “new” rules for all mortgages are welcome additions, I guess, and really should be no brainers. I’m pretty sure coercing appraisers into misstating home value was already a no-no, but now it is “official,” for whatever that’s worth.
The new subprime lending rules are, for the most part, already being followed. At this point in time a borrower is going to be hard-pressed to get a loan if they can’t document their income (unless they are putting down a large down payment). Also, on almost all loans now--and in recent memory--lenders have required escrow accounts to pay for taxes and insurance. Since this was the norm even during the subprime heyday, I’m not sure exactly what they were trying to accomplish, but I guess we can now use that “official” word again. The biggest change that I can see is with the pre-payment penalties. In the past, having a two year pre-payment penalty was pretty much the norm, and borrowers who wanted to get that waived had to buy it off. From the lender's perspective it made complete sense: They wanted to ensure that they were able to make at least X dollars on the loan even if the borrower sold the house the next day. This is one that I think could backfire for borrowers. Now that lenders are not going to be able to add a pre-payment penalty, they are going to make the loan more expensive because they have to ensure that they are able to make their profit no matter what the borrowing time frame. So we can expect that buy-down pricing will now be included in every loan--whether the borrower wants it or not. The borrower who knows that they are going to be in the property for at least two years will now have to pay a little more on their loan. I think a better solution might have been to make the pre-payment penalty opt in rather than opt out--that way people who do want it can still have it.
All in all, I think these new regulations were more for show than for function. The government needed to appear like they were trying to do something about the problem, so they put together a list of things that look good on paper, but in practice are pretty much useless.