The Federal Reserve first published their proposed Regulation Z back in January, 2008, with a deadline for public comments to be made by April 8, 2008. The proposal now has been enacted with some important (I think) changes to be made to mortgage lending practices. I say I think they are important because I thought they were being done before, but apparently I was wrong!
The first set of changes were made to regulations for higher priced mortgages (sub-prime loans with high interest rates). They seem common sense to me. Why do they even have to make these rules?
- Lenders cannot give a loan to borrowers that do not have the ability to pay back the mortgage. Well, duh! I thought this was the case already. It seems sub-prime mortgages (given to buyers with borderline or worse credit) formerly were not required to be sure borrowers had income to make their mortgage payments! And we wonder why so many people are losing their houses? A subset of this regulatory change is that borrowers must qualify to make payments on the highest possible payment of an adjustable rate loan rather than the introductory rate they qualified for before. This is a caution I made to all of my clients who used ARM's to make their purchases. It is just common sense to make sure you can make the worst case scenario of adjustments work!
- Income and assets apart from the collateral of the house have to be verified! Oh, so they mean the borrower can't just SAY they make $100,000 per year? They actually have to prove it? Common sense, I say again!
- Escrow accounts have to be set up so the borrower pre-pays 1/12 of their annual taxes and insurance into this special account from which the lender draws to pay the annual tax and insurance bills. Mortgages for people with good credit do this. Wouldn't it just be common sense that people with less than good credit would have to do the same thing?
- Pre-payment penalties are only allowed within strict circumstances. There are no pre-payment penalties allowed within 60 days of an adjustable interest rate being reset. This allows borrowers who want to refinance in order to avoid a high interest rate to do so without a financial penalty.
The next set of rules applies to most mortgages including prime mortgages. These, too, seem like common sense.
- Lenders and borrowers cannot influence appraisers to assign a specific value to a home. Considering that appraisers get a copy of the purchase agreement before doing their valuation, it seems they are already being influenced. The purchase agreement certainly states the "goal" value in the purchase price!
- Seven changes in how lenders can advertise were made including that they must disclose when a low rate is just an introductory or "teaser" rate; an ARM must be disclosed as an ARM; and if the current mortgage servicer's name is used, it must be disclosed that the offer provider does not represent the current company.
- Lenders must provide a good faith estimate of the costs of all types of home loans including a payment schedule within 3 days of application. These are currently only required on home purchase loans.
- Companies collecting the loan payments must credit the payment when it is received and not hold it; late fees can no longer be "pyramided"; and pay-off figures must be provided in a timely manner.
Some of these changes needed to be made, but some of them really are common sense! I know if I was the lender I certainly wouldn't give someone a couple hundred thousand dollars without knowing they had the means to pay me back!
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