The Federal Reserve on Monday published new rules aimed at protecting consumers from abusive mortgage practices, including clearer cost disclosures and a ban on payments to mortgage brokers for steering borrowers into loans with higher interest rates.
The Fed said it would ban payments from lenders to brokers based on interest rates paid by borrowers or other loan terms. The final rule, which takes effect on April 1, 2011, will end the so-called “yield spread premium” payments blamed for pushing millions of borrowers into unaffordable loans.
It also prohibits loan originators from “steering” consumers into mortgages that increase payments or bonuses to a broker or loan officer.
“This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points,” the Fed said.
The Fed also issued a new interim rule that requires lenders to provide consumers with clearer disclosures about their loan costs, including a table that states the maximum interest rate and payment that can occur during the first five years of an adjustable-rate mortgage and a “worst case” example showing the highest possible maximum rate and payment over the life of the loan.
Lenders must also warn consumers they may not be able to refinance their loan in the future to avoid higher interest rates, the Fed said.
Many consumers were lured into “exotic” adjustable rate mortgages with hefty balloon payments by brokers who advised them that these loans could be refinanced in two years — an option that vanished when housing prices collapsed.
The Fed is taking public comments for 60 days on the proposed rules, but said it intends for lenders to comply with them for all applications received after January 30, 2011.
Although the Fed received massive criticism for lax mortgage disclosure rules in the wake of the financial crisis, most of the interim and final rules issued on Monday were in development well before last month’s passage of landmark financial reform legislation by Congress.
The reform bill will require another round of rulemaking on mortgages by the new Consumer Financial Protection Bureau, including a new, common simplified mortgage disclosure statement that must be in place within two years.
Other new rules issued by the Fed on Monday include a final rule requiring that borrowers receive notice of a sale or transfer of their loan and proposed rules on disclosures of reverse mortgages.
It also proposed raising the interest rate threshold for requiring tax and insurance on so-called jumbo loans to 2.5 percentage points above the prime offer rate from 1.5 percent above prime. Jumbo mortgages are larger loans that exceed the Freddie Mac conforming loan purchase limit.
