Finance Globe

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Federal Reserve Sets New Mortgage Rules

The Federal Reserve has tightened lending standards with new rules for home mortgages. These new mortgage rules are meant to protect American consumers from the types of irresponsible mortgage lending practices that have been blamed for leading us to the country's worst real estate market crisis in decades.

"The proposed final rules are intended to protect consumers from unfair or deceptive acts in mortgage lending, while keeping credit available to qualified buyers and supporting sustainable home-ownership," said Federal Reserve Chairman Bert Bernanke.

The rules address all mortgages, including additional rules for a newly defined category of "higher-priced mortgage loans", the sub-prime mortgages that are responsible for the mortgage mess.

Under the new plan mortgage lenders are required to verify the borrower's income and ability to repay before they approve a high-risk mortgage. This common-sense approach is meant to ensure that mortgage lenders only approve loans that borrowers can realistically pay back.

The rules also ban many of the prepayment penalties that have been common with sub-prime loans in the past. Prepayment penalties punish a borrower for paying more than the allowed limit to principal each year, or refinancing or paying off the loan, sometimes even if the pay-off is due to selling the home within a certain time-frame.

For all mortgages, other practices are also banned, such as pyramiding late fees, coercing a real estate appraiser to state an inaccurate home value, and giving borrowers a deceptively low loan cost estimate. Also restricted are some types of misleading advertising practices, such as calling a loan "fixed" when the rate actually can change. More common-sense, with some ethics thrown in.

Bernanke said, "Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lender resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower."

Most of the newly approved rules will go into effect on October 1, 2009.

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Friday, 10 July 2020

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