The Fed’s New Rules for Mortgage Lenders

“Government in action” is an oxymoron. Various agencies and Congress have been fiddling around with re-regulating the mortgage industry ever since the crisis became apparent late last summer. There is little progress to report. We finally get the Federal Reserve Board, which administers a small “slice” of the mortgage business, to do something. They announced some changes to Regulation Z, the so-called Truth in Lending regulation.

Given the depth of the credit crisis, when do you think that it ought to take effect? How about tomorrow? How about October 2009? Well, if you guessed tomorrow, you were wrong. I suppose that if a sneaky lender thought that the new regulations would crimp their style, this gives them another 14 months to screw their clients.

There are some absolutely silly provisions to the law. The first is the regulations that apply to subprime lenders. Why is that a problem? That industry doesn’t exist any more. I suppose if it ever comes back, the next class of subprime lenders will have some new rules that govern what they do. Of course, you can suspect that this next group will also have 14 months to figure out a way around the regulations just as the last bunch did.

The parts that apply to “normal” loans are superfluous, to wit:

1. Lenders can’t coerce appraisers to misstate a home’s value

COMMENT: This has always been a no-no but there may be a modification to the rules that govern appraisers to include this specific wording. You might want to see how strict the current rules are. CLICK HERE .

2. Lenders can’t pyramid late fees and must post payments promptly.

3. Lenders must provide a Good Faith Estimate of Closing Costs within 3 days of application.

COMMENT: The Fed comment states that this has been a legal requirement only in purchase transactions but I cannot find anything in Regulation Z that says it is restricted to purchases only. As a matter of practice in the 28 years I have been in the business we always provide a Good Faith Estimate, an Itemization of Amount Financed, and a Truth-in-Lending disclosure to every borrower in every transaction, refinances included.

So when you look at this new regulation, you’d have to say “Whoopee-Do.” I think that it is ridiculous to think that consumers will benefit from these new rules.

What the Fed did not do was to take positive action on two things that could have had a dramatic positive effect on consumers:

The first was to change rules that apply to Yield Spread Premiums paid to brokers and to equivalent compensation loan officers of mortgage bankers and other regulated institutions. Their excuse was

“the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule.” 

Well, let me tell you something: consumers sure don’t understand the current system. What the Fed ought to do is give borrowers a rule that they may not understand either but which would protect them. The current policy is a license to steal and has been the driving engine behind the current credit crisis. You would think that the Fed, whose job it is to protect consumers, would understand this but it appears that they are clueless.

The second was that they dodged the opportunity to make mortgage brokers declare their compensation at upon application and not be able to change it during the transaction. This continues the opportunity for bait-and-switch that is so prevalent today.

To this last point, I recommend that you use an Upfront Mortgage Broker which will voluntarily do what the Fed ought to have everyone do. This group of honest brokers will tell you upfront what their compensation is and agree not to change it during the processing of your loan. Full disclosure: I was one of the original members of this group and am on the Board of Directors.

For more information and to search for a UMB in your area, CLICK HERE .

For those who are interested in seeing the Fed’s announcement, go to http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm