WASHINGTON (AP) -- The Federal Reserve unveiled a proposal today that would give people taking out home mortgages new protections against shady/predatory lending practices.
The proposed rules, recommended by staff and expected to be endorsed by the Fed at its morning meeting, are especially geared to subprime borrowers. The proposal is expected to apply to new, or future, loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.
The Fed is considering the following:
- restricting lenders from penalizing subprime borrowers with tarnished credit or low incomes who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.
- forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.
- barring lenders from making loans when they don't have proof, or verification, of a borrower's income (good-bye to "stated income" loans).
- prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.
"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole," said Fed Chairman Ben Bernanke in prepared remarks. "They have no place in our mortgage system," he added.
Fed policymakers also are considering requiring financial disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees - except for a fee to obtain a credit report - until after the consumer receives the disclosures. The Fed also will consider prohibiting certain types of misleading or deceptive advertising for certain loans; It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory, or "teaser" rates.
In addition, the Fed is expected to propose barring lenders from paying mortgage brokers a fee that exceeds the amount the would-be borrower had agreed to in advance that the broker would receive.
And, the Fed would ban certain practices, such as failing to credit a mortgage payment to a borrower's account when the company servicing the mortgage receives it. The Fed also would prohibit a broker or other company from coercing or encouraging an appraiser to misrepresent the value of a home.
Before taking effect, the rules must be voted again following a period of public comment and possible revisions.