The newspapers today were filled with headlines that the Fed was curbing “shady lending” practices. Of course, these articles were a little vague on what the name of the regulation was and what date these rules would go into effect.
Going straight to the horse’s mouth, I learned that the Fed is amending Reg Z to deal with “higher-priced mortgage loans” in the following manner:
“The final rule adds four key protections for a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling. For loans in this category, these protections will:
- Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
- Require creditors to verify the income and assets they rely upon to determine repayment ability.
- Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
- Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans. ”
It goes into effect October of 2009.
And that’s just the federal amendment. California’s Senate Bill 1137 passed on July 8, 2008–EFFECTIVE IMMEDIATELY. The legislation requires lenders and mortgage loan servicers to: 1) contact borrowers about restructuring options before beginning the foreclosure process, 2) requires a 60-day notice to be given to tenants of buildings facing foreclosure before they can be removed from a rental housing unit; and 3) allows fines of up to $1,000 a day for owners of foreclosed properties that fail to adequately maintain them.
And folks…I think there is more legislation to come. I have been a bit baffled by S.B. 1137 because while it makes a lot of sense to increase communcation with borrowers and work out a loan modification (I often do this for junior lenders) it doesn’t make a lot of sense to prolong the f/c process by another 30 days.
Often if a borrower is trying to walk away–no loan modification would give them an incentive to pay because they do not want to pay a mortgage on a house worth less than the mortgage. Thirty more days simply delays the inevitable–and prolongs our economic slump.