New Rules in Mortgage Lending

By Angela Baca


New rules from the Fed have changed mortgage-lending practices. Although the new rules were put in place to help protect consumers, they may also cause an increase in loan processing time.

Amendment to Regulation Z
On July 14, 2008, the Fed amended Regulation Z (Truth in Lending) to prohibit unfair, abusive, or deceptive practices by mortgage lenders and to restrict other practices. Lenders face new advertising standards, and they must disclose information early in the loan process. All lenders must follow advertising standards regardless of whether they have federal deposit insurance.

New Rules for Consumer Protection
For a consumer who needs another loan based on the first home's value, lenders must take 4 new steps:
1. Avoid writing a loan without considering ability to repay beyond a home's equity.
2. Verify income and assets.
3. Eliminate prepayment penalties for mortgages with adjustable payments within the first four years; for other loans, the prepayment penalty lasts no more than two years.
4. Establish escrow for taxes and insurance on the first mortgage.
The foregoing rules apply to higher-priced mortgages, or subprime loans with an interest rate at least 1.5 percentage points above Freddie Mac's prime rate and 3.5 percentage points above for subordinate mortgages. Requirements for all Lenders
New rules apply to subprime mortgages and most other mortgages, but do not affect construction or bridge loans, reverse mortgages, or lines of credit (LOCs). Regardless of your interest rate, the following affects a loan secured by your primary residence:
1. A creditor or mortgage broker cannot coerce an appraiser into being dishonest about a home's value.
2. Mortgage servicers cannot use certain practices, including pyramiding late fees. They must credit payments on the date of receipt and provide loan payoff information within a reasonable period.
3. A lender must provide a borrower with a Good Faith Estimate (GFE) within 3 days of receiving their loan application. The applicant cannot be charged any fees, except for the cost of pulling credit history, until after they have received an early disclosure.
4. Once the applicant receives the final cost disclosure, the lender is required to wait seven days before closing on the loan. If the final annual percentage rate (APR) varies by more than .125% from the initial GFE disclosure, the lender must re-disclose and wait yet another three days before closing.
Stricter Advertising Rules
Lenders must also provide more information when they advertise rates, monthly payments, and other features. There are stricter rules against misleading advertising and a ban against saying a rate is fixed when it might change.

These rules are part of the Mortgage Disclosure Improvement Act (MDIA) and were effective July 30, 2009, except for the escrow requirement (which will begin in 2010). Be sure to get more updates from your real estate agent or broker about the changing mortgage market.