Fed Approves Plan To Curb Irresponsible Lending

The Fed has unanimously approved a new plan to tighten provisions designed to prevent predatory mortgage lending, as well as help to decrease the number of consumers who irresponsibly take on debt that they cannot afford to repay.

The proposed changes would (among other things) prohibit lenders from issuing loans without taking into consideration the borrower’s ability to repay the debt from sources other than the home’s value, severely limit prepayment penalties on loans that are subject to rate increases, prohibit creditors and brokers from coercing appraisers, and stop lenders from using the term “fixed” to describe non-fixed loans.

The proposal is open for a period of public comment before the changes take effect next year. You can read the details of the proposal at the Fed’s website.

Here’s Chairman Ben Bernanke’s statement in full:

We are meeting today to discuss proposed regulatory amendments to protect consumers from fraud, deception, and unfairness in the mortgage market. Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole. They have no place in our mortgage system. Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy. We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated.

In recent years, mortgage markets have seen a remarkable wave of financial innovation. The advent of large secondary markets and the use of automated underwriting, for instance, have brought more capital into the system and, in most respects, have helped our mortgage markets function more efficiently while providing wider access to mortgage credit. But some of these innovations also have negative aspects. As the mortgage market has become more segmented and as risk has become more dispersed, market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded. The consequences, as we are currently seeing, can include the proliferation of unfair and deceptive practices that can be devastating to consumers and to communities.

The Board is responding to these problems with proposed rules that were carefully crafted with an eye toward deterring improper lending and advertising practices without unduly restricting mortgage credit availability. We look forward to the public’s comments about our approach. I should note that new rules, once adopted, would apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Thus, we will continue our concerted efforts to work collaboratively with our fellow regulators, both state and federal, to see that the rules are consistently applied and vigorously enforced.

Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z [FED]
Statement by Chairman Ben S. Bernanke [FED]


Edit Your Comment

  1. Parting says:

    Too late, too little…. :(

  2. Slothrob says:

    Maybe if we accelerate these laws to 88mph, we can send them back to 1999!!! But we’ll need to find a powersource of at least 100 jigawatts!

  3. howie_in_az says:

    How does this address Alt-A loans, or whatever the one is where people don’t have to prove their income? How would the lender know that the borrower could repay the loan then if they don’t have a clear picture of the borrower’s income?

    While I think it’s a great idea for lenders to think about, you know, getting their money back from a borrower, borrowers need to live within their means. Or are lenders now supposed to calculate budgets for borrowers and see if the borrower can actually repay the loan? Is it based soley on (stated) income?

    A much easier solution is to simply ban housing.

  4. Meg Marco says:

    @slothrob: 1.21, but otherwise a sound plan.

  5. Slothrob says:

    Great explanation that partially touches on why the banks stopped verifying income:

    [From the BBC via Digg]

  6. FLConsumer says:

    @howie_in_az: There are already laws in place making overstating your income for the purposes of obtaining a loan illegal. We just need to enforce them.

  7. FreemanB says:

    Now if they can just come up with some law to stop irresponsible borrowers as well…

  8. Tank says:

    @flconsumer – i think howie_in_az is talking about a stated income loan, where you don’t have to “prove” your income, just write down a number. i have a mortgage broker friend that calls them “liars loans”. and yes, it’s probably illegal to overstate your income, but if you’re playing by the rules set forth by the mortgage lenders, and they do no due diligence, everyone gets what they got coming.

  9. sickofthis says:

    In many cases, brokers were altering applications and falsifying appraisals to make loans go through so that they could get their broker fees and yield-spread premiums. The borrowers often didn’t know anything about it.

  10. spinachdip says:

    The barn doors are closed, yay!

  11. sven.kirk says:

    @spinachdip: Not yet. But they are on their way.

  12. iamme99 says:

    And Alan Greenspan said the FED couldn’t do anything to stop the bubble. Too bad no one thought about this, say 5 years ago….

  13. Bunklung says:

    Changing regulation, although not as far as I’d like to see it go, is a real solution so this doesn’t happen again.

    Bailouts are wrong, the regulation change is music to my ears.

  14. Vicky says:

    “Require that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.”

    If I had believed what the mortgage company told me my property taxes would be in the first year (I did not) and allowed them to escrow for me (I did not) I would have found myself in a very bad situation come January. They estimated the taxes at around $700 (the rate for the unimproved land) and they came out to $3460. Luckily I had planned for this from the start – otherwise my escrow account would be in the red and my mortgage payment would have gone up by $230 per month to pay the difference. This is a common scam with new home builders around here and it’s in many cases even more costly than an interest rate reset.

  15. Voltron's Underwear says:

    That’s ok… we’re all going to bail these people out anyway. Senate bill S. 2338, The FHA Modernization Act of 2007, will increase FHA limits to $417k, eliminate or lower the down payment, and give ‘flexibility’ to the FHA to make loans to sub-prime borrowers.

    Basically they shut the flood gates at these lenders and threw the doors open at the good old FHA. I’m not saying that this won’t help a lot of ppl who need it, but we’ll still be footing the bill for the rest of them that got in way over their heads…

  16. spinachdip says:

    @iamme99: Which is a load of bull, of course. You can either let the market cycle do its thing and let the economy go on a downslide, or you can try to sustain it beyond reason. Greenspan chose to do the latter.

  17. ageshin says:

    What we are seeing is the result of a great feeding frenzy with the poor and middle class the food. There will be great wailing and grinding of teeth. The small feeders will be punished, while the big boys will pocket their money, as they wait for the next oportunity to give it to us. Remember just what the market forces are, greed and more greed. What is needed is good regulation to prevent such events. It seems that we haven’t learned a thing from the great depression.

  18. gman863 says:

    News Flash! It takes two groups to create a mortgage meltdown: Stupid lenders and stupid borrowers.

    While some people have sub-prime credit due to bad luck (layoffs, illness, divorce), the majority of low credit scores are the result of people who think credit is a license to live beyond their means.

    If a person can’t pay their rent, credit card bill or auto loan on time, how can they (or the lender) assume their ability to pay a far larger monthly mortgage note will be any easier?

    The term “adjustable rate” should be a tip off to anyone with an IQ above 80. The interest rate (and monthly payment) are almost certain to go up after the low teaser rate expires. If you can’t afford the higher payment, you run the risk of losing your home.

    When I moved to a new city earlier this year, I was pre-qualified for a mortgage line of credit that – had I accepted the maximum amount – would have resulted in a monthly payment of almost 50% of my take home salary (not including escrow for taxes & insurance)! Rather than play the financial version of Russian Roulette, I bought a nice home I knew I could afford and stuck with a fixed-rate mortgage. As a result, I am making my payments on time and (gasp!) actually putting money in savings in the event an unexpected crisis comes up.

    Classes on how to manage money should be mandatory in High School. As for adults wanting to buy their first home, it should require a minimum of two years of immaculate on-time payments in their credit file before a lender even considers their loan application.

  19. mconfoy says:

    @FreemanB: @Tank:

    From today’s front page, New York Times: “Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

    But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

    In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

    And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

    John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

    “He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

    Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?

    An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

    ” On Tuesday, under a new chairman, the Federal Reserve will try to make up for lost ground by proposing new restrictions on subprime mortgages, invoking its authority under the 13-year-old Home Ownership Equity and Protection Act. Fed officials are expected to demand that lenders document a person’s income and ability to repay the loan, and they may well restrict practices that make it hard for borrowers to see hidden fees or refinance with cheaper mortgages.

    It is an action that people like Mr. Gramlich and Ms. Bair advocated for years with little success. But it will have little impact on many existing subprime lenders, because most have either gone out of business or stopped making subprime loans months ago.”

    More at [www.nytimes.com]

    Much simpler to blame the borrower though, isn’t it? Well can’t stop the ignorance out here I guess.