Abuses the Fed hopes to correct with the new mortgage rules
You may be wondering exactly what the Fed hopes to achieve with its rules change. The Fed spelled out its goals yesterday:
- "Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans." My take: Prior to this new rule many brokers did not disclose how much money they were making by steering consumers to subprime loans. Consumers who could have qualified for prime loans were encouraged to take subprime mortgages so brokers could make more money.
- "Prohibit certain servicing practices, such as failing to credit a payment to a consumer's account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees." My take: The fact that these practices were not stopped prior to this rule change are outrageous. I don't know why this was allowed for so many years.
- "Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home." My take: This is one of the key abuses that got so many homeowners in trouble today. Many have homes that are worth much less than the amount due on their mortgage because of these abuses. Yes, its true that the downturn in real estate is impacting home values, but it's this abuse that helped to fuel the real estate bubble that just burst.
- "Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term "fixed" to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates." My take: Again, I'm confused. I thought the current rules on truth in advertising should have stopped these abuses. Why didn't it and why didn't the Fed act as soon as they saw this misleading advertising?
- "Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report." My take: A change that's been needed for a long time. You can't compare apples to apples until you get these numbers, but too often consumers must pay application fees before they get to see these numbers and are therefore reluctant to spend even more money to get information from another lender, making shopping for the best deals more expensive.
Seeing these goals it's no surprise Congress wants to act to take away some of the Fed's control over consumer banking practices. Clearly the Fed sees its allegiance to the banks and will only act to protect consumers when it's forced by public reaction to do so.
Lita Epstein has written more than 20 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions You Should Ask to Avoid Foreclosure."