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The higher-priced benchmarks will also never apply to the overwhelming majority of loans to be made in the future and they will not apply to any loans for at least a year because the new standards only become effective on October 1, 2009. The escrow account standards do not kick-in until April 1, 2010, for higher-priced mortgage loans secured by manufactured housing.

General Rules
While the Fed changes largely deal with higher-priced mortgages, broader regulations that apply to all loans have also been developed.

“Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees,” says the Fed. “In addition, servicers are required to credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.”

This rule surely makes sense but it also raises a point: Does the Fed mean lenders were ever allowed to pyramid late fees?

The Fed also says that “creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.”

In addition to expanding the use of good faith estimates, the 2008 standards will impact lenders who charge “application” fees. The reason for an application fee, often $300, is that the lender can keep the money if the borrower goes elsewhere or decides not to get a loan. However, the new language says that application charges are prohibited before the delivery of a good faith estimate, meaning that borrowers will have a better chance to understand their loans before writing a check.

What's Missing
When the Fed proposals were first put up for comment last December, Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said the suggested rules confirmed two facts: “one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other.”

The final Fed rules are objectively better than the December proposals. That said, they leave huge gaps:

  • Why should rules limiting prepayment penalties not apply to all loans? Why should prepayment penalties be allowed at all? Why not prohibit the imposition of prepayment penalties at least 60 days before loans re-set? Why not bar prepayments because a borrower must move, especially for a job change or military re-assignment?
  • Why not ban stated-income loan applications? Borrowers with exotic finances and complex tax returns were able to get mortgages before stated-income applications were developed, so surely lenders can handle such applications now.
  • Why do the new rules largely exclude reverse mortgages? Are seniors not a target for scammers and predatory lenders?
  • Why delay the application of the new rules for more than a year?
  • Why do the rules for good faith estimates only apply to principal residences? Why shouldn't individuals with second homes or investment property also get a fair shake in the marketplace?
  • Why allow lenders to qualify Alt-A and prime borrowers without verifying income and job claims? Given that a growing number of million-dollar homes are now in foreclosure it should be fairly obvious that even well-healed borrowers are defaulting.


The list could go on but the point is this: Look for Congress to revamp loan standards further, if not now then after January 1st.

****Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.****

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