Federal Reserve's New Mortgage Lending Rules to Take Effect October 2009


Following months of criticism that federal regulators have been slow to address the subprime mortgage crisis, the Federal Reserve Board ("the Fed") unanimously approved new rules to curb misleading and deceptive practices in mortgage lending, especially subprime loans. The new rules will take effect October 1, 2009.

The rules place particular emphasis on "higher-priced mortgages," a category the Fed is defining on the basis of a new index that it will publish; the index will track the "average prime offer rate" derived from a survey that is currently published by Freddie Mac. This mortgage category captures virtually all subprime loans.

New rules for such mortgages will prohibit lenders from making loans without considering a borrower’s ability to repay from income and assets other than the home's value. This provision "effectively giv[es] wronged consumers a private right of action without demonstrating that their case was part of a broader pattern," said Federal Reserve Board Member Randall Krozner, as reported by the Washington Post. Without this change, "[i]t would have been difficult otherwise for borrowers to make the case for deceptive practices," said Deborah Goldstein, executive vice president of the Center for Responsible Lending, as reported in The New York Times.

While some consumer advocates have pushed to eliminate prepayment penalties altogether, the new rules do not go that far. Instead, lenders will be prohibited from imposing prepayment penalties if the payment can change during the initial four years of the loan. The lender must also establish an escrow account for the payment of property taxes and homeowners' insurance on first-lien homes, but borrowers may have the option to cancel such escrow accounts after the first year.

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