Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
Creditors would be required to verify the income and assets they rely upon in making a loan.
Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.
Creditors would have to establish escrow accounts for taxes and insurance.
The Fed also proposed several steps to protect the consumer...
Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value.
Companies that service mortgage loans would be prohibited from engaging in certain practices. For example, servicers would be required to credit consumers’ loan payments as of the date of receipt and would have to provide a schedule of fees to a consumer upon request.
Now, far be it from me, a mortgage broker, to question the Fed, however these proposals range from absurd, to already taken care of by the market, to frankly unenforceable. let's take things one at a time. First, it is important to note that the Fed, through a complicated interest rate scoring scheme, has insured that most of these proposals would only affect sub prime. Second, sub prime is about to be totally eliminated by the market itself and its fall is only being helped by measures like this. Finally, despite what the politically correct police will tell you, it is the poor that are the overwhelming recipient of sub prime loans, and its fall will mean the poor will wind up with significantly reduced mortgage options.
Here is proposal one...
Creditors would be prohibited from engaging in a pattern or practice of
extending credit without considering borrowers’ ability to repay the loan.
Here the Fed has decided to be no less vague than anyone else, and thus here is the practical effect...
YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET
No, you haven't because banks will have to create more paperwork to deal with this vague and undefined new regulation. That is what banks, rightfully so in fact, do with every piece of vague and undefined legislation and regulation. Besides creating at least one more document, the reasonable ability to pay disclosure no doubt, this particular piece will have little practical effect. That's because a reasonable ability to pay is in the eye of the beholder. I once got a borrower approved with a debt to income ratio of 90%. That means ninety percent of their GROSS income (that's before taxes are taken out) went to their debts. How did they get approved? They had more money in the bank than the loan amount, perfect credit, and the loan to value was below 50%. The wife, the bread winner, recently got laid off and didn't want to go back to work yet. It's hard to know if this particular loan would violate this new regulation because unless it is more clear, there is plenty of grey area.
Creditors would be required to verify the income and assets they rely upon in
making a loan.
I guess the Fed chairmen don't know much about market economics, because there is almost no stated income loans left in sub prime. Those that remain are for low loan to values and high credit scores. Furthermore, they usually apply to business owners. Without stated income loans, business owners will almost never get any loan approved.
Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.
Once again, the Fed doesn't have much of an understanding of market economics because there are almost no pre pay loans left in sub prime. Unless, that is, if you count option arm loans. If you do count option arm loans, then this portion of the legislation will go a long way toward eliminating said loan from the market place. While no pre pay option arm loans have become more popular in recent years, most banks need the pre pay in order to make the loan profitable. Without it the loan isn't marketable and thus would disappear.
Creditors would have to establish escrow accounts for taxes and insurance.
Mark my words on this. You will one day chalk this one up as an unmitigated disaster of unintended consequences. Escrows are one of the many insidious vehicles that make me convinced that banks are among the most vile and evil entities around. What this will do is create a situation in which poor folks will be required to bring in one and more thousands of dollars with them to closing. Money that most poor folks simply don't have.
Here is how escrows work. The account needs to be filled up at the closing, be it a purchase or a re finance. There must be enough in the account to cover the tax bill. Let's look at an example. Let's say someone has a yearly tax bill of three thousand, or fifteen hundred every six months. Let's say the taxes are due September and March first. Let's say the closing is in May. This means the first payment is July 1st. That means there would be three payments before the taxes are due. This means the account would need to be filled up with three months worth of taxes. There is just one more thing. Banks require an extra two months of taxes as cushion. This means this particular borrower would need an extra five months worth of taxes, $1250 brought into closing. Keep in mind this $1250 is on top of everything else. Sub prime borrowers routinely struggle to make ends meet to figure out how to get a loan closed, and now the Fed has made that process even harder.
Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
This particular piece proves there is too much paperwork because this disclosure already exists. It is rarely filled out and even more rarely looked at by any borrower let alone a sub prime borrower who is less sophisticated. In other words, the Fed has just asked mortgage brokers to do what they are already doing. The reason they are is not because such a disclosure doesn't already exist, but rather because so many do that borrowers don't know it.
Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value.
Again, fraud is now and always has been illegal. For the Fed to come out and proclaim that fraud will no longer be legal the height of naivite. The problem has never been the plethora of legislation agaist fraud, but rather enforcement. Having one more law against fraud will solve nothing. Unscrupulous brokers don't pressure appraisers to get them bloated values. They seek and find appraisers willing to do it without pressure.
Companies that service mortgage loans would be prohibited from engaging in certain practices. For example, servicers would be required to credit consumers’ loan payments as of the date of receipt and would have to provide a schedule of fees to a consumer upon request.
Frankly, I don't know what this means. This is not merely vague, but rather convoluted. I don't know what fees the Fed is hoping borrowers know about, however, while the $20 fax fee the bank charges when I ask for a pay off is annoying and despicable, it isn't going to make or break any consumer.
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