Feds sign off on new predatory lending rules
Saint Paul / Minneapolis, Minnesota: Yesterday, the Federal Reserve signed off on the much anticipated new set of predatory lending rules. While most legitimate lenders, brokers, and consumer groups applaud the action, it is more smoke and mirrors than any true fix. It looks like the government is doing something, but it is more akin to closing the barn doors well after the horses have left.
The new rules will cover only new loans, not previously existing ones. Additionally, the bulk of the rules would have really only effected the short-term lenders who jumped into the over heated mortgage market, caused a lot of damage, and have long since gone out of business and disappeared. Good lenders, following good lending practices will actually see little or no changes to how they operate.
The biggest change is the nationwide elimination for not only brokers, but also banks, of any no proof of income type loans. These loans were highly abused by both bad lenders and borrowers alike. The new rules prevent any lender from making a loan without looking at a reasonable proof of their income and ability to pay back the loan. Unfortunately, many legitimate borrowers (typically the self employed), will now be completely without any home loan options.
Another key point is the requirement of full disclosure of not only the principal and interest payment, but taxes and insurance too. This problem was highly noted in new construction, where builders, using the builders "preferred lender", focused on only the principal part of the payment. Many inexperienced buyers failed to calculate their ability to pay once you added insurance, association dues, and property taxes into their overall housing obligation. This problem really kicked in as many new construction buyers never realized, or were told that typically you only pay empty lot based taxes the first year or so, then taxes sky rocket up as they were now assessed the full improved value of the lot including the home. This could easily have added hundreds of dollars to their monthly payment.
Pre-payment penalties, another highly controversial subject between lenders and borrowers will also be severely restricted, but not eliminated completely. Consumer advocacy groups wanted the penalties lifted altogether. Unfortunately, the side effect is that without the penalties, everyone may now have to pay more.
Finally, the new rules add more teeth to the existing advertising rules which bad lenders completely ignored, and to which the regulators allowed to be abused. Again, looks good in the press, but truely a meaningless action.
(c) Metzler Mortgage Group - www.JoeMetzler.com