Federal Reserve governors unanimously proposed tough new consumer-friendly disclosure rules for mortgages and home equity loans last week, tackling one of the less-appreciated causes of the nation’s deep financial crisis.
The Fed’s division of consumer affairs proposed, and governors accepted, a change to how finance charges and the annual percentage rate would be calculated. They also proposed restricting some bonus compensation from lenders to those who originate loans.
Under the Fed proposal, lenders or other originators of mortgages-such as mortgage brokers-would have to provide borrowers with clear one-page explanations of how adjustable-rate mortgages, like those that triggered the housing crisis, differ from fixed-rate products. They’d have to provide clearer examples of what borrowers’ true costs would be, using the loans themselves rather than generic examples. In doing so, they’d have to include things such as title insurance and pest inspection that aren’t factored in now.
Lenders will also have to notify borrowers of payment changes 60 days beforehand, rather than the current 25 days. Similarly, for home-equity lines of credit, the notification period would be 45 days instead of 15.
The proposed rules also would allow home-equity lenders to suspend or reduce lines of credit when the prices of the properties involved decline by 5% and the borrowers have paid off no more than 10% of the loans. This gives lenders more legal cover to pull back credit, something they’ve done of late-to the ire of consumers-without clear guidance from federal regulation.
The most controversial proposed change is restricting special compensation from lenders when mortgage brokers get borrowers into higher-priced loans when they qualified for lower rates. This bonus, called a yield-spread premium, was a factor in the explosion of sub-prime lending, which involved high-cost loans given to the weakest borrowers.
A 4 month comment period is required before these proposed changes can become rules.
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