New Fed Rules to Prevent Future Runs on Bad Loans

The Federal Reserve Board has amended the "Truth In Lending Act," Regulation Z under the "Home Ownership and Equity Protection Act (HOEPA)."  Originally passed in 1994, HOEPA targets abusive practices in home equity lending.  The Fed now extends the Act's protections to include home purchase loans.  Effective October 1, 2009, these new rules should help prevent future runs on bad loans.  The new rule's four key provisions include protections that:

• Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.  Lenders must more closely scrutinize a borrower's debt-to-income ratio, looking for less debt, more income and savings, larger down payments, and other liquid assets the borrower can fall back on.
• Require creditors to verify the income and assets they rely upon to determine repayment ability. This provision will make it especially tough for home-based business owners, self-employed people, contract workers, and others who don't get a regular pay stub.
• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. Without this lender risk-reducing tool they are more likely to offer a narrower variety of loans, forcing some consumers out of the market and more of them to spend more time shopping around.
• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans. This means borrowers will have to figure on paying more each month than just the home loan's principle and interest (or interest only, where available).

Other rules include:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. Servicers are also required to credit consumers' loan payments as of the date of receipt.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.