The Federal Reserve Board on Monday announced rule changes for home mortgage lenders to help protect consumers from deceptive lending practices. The new rules, which amend Regulation Z of the Truth in Lending Act, adds four key protections for higher-priced mortgage loans.
-Prepayment penalties will be banned if the payment can change in the initial four years. For other higher-priced loans, the prepayment penalty period cannot last more than two years.
-Creditors must verify income and assets to determine repayment ability.
-Lenders must establish escrow accounts for property taxes and homeowner’s insurance.
-Lenders are prohibited from making a loan without regard to the borrowers’ ability to repay the loan from income and assets other than the home’s value.
In addition, the following rules apply to all mortgage loans regardless of price:
-Mortgage lenders cannot coerce an real estate appraiser to misstate a home’s value;
-Mortgage companies must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for a loan;
-Loan companies will be prohibited from certain practices, such as pyramiding late fees. They will also be required to credit loan payments as of the receipt date and provide a payoff statement within a reasonable time period.
All of the rules, except the escrow requirement, will take effect October 1, 2009.