Fed tightens up lending rules

The central bank is focusing on better regulations to protect the home buyers. This move is to curtail the bad lending system. Federal Reserve has proposed a new set of regulation which will be much stricter on the part of the lenders.

Public comment is possible for 90 days. After review of the comments, the final rules will roll out of Fed’s factory.

Fed has proposed rules for both subprime loans and all types of mortgages. Higher-priced mortgage loans will come under these rules as well. (Higher-priced mortgage are those loans which has an interest rate 3 percent higher than the treasury securities).

Subprime plan

Prohibition on unaffordable loans- Now lenders cannot lend a loan without taking into consideration the income of the borrower.

Restriction on ‘liar’ loan- The new rules say the lenders should verify the income and assets of the borrowers. There will be restriction on the liar loans or stated income loans.
Limitation or prohibition of prepayment penalties- Fed wants lenders to waive the prepayment penalties. These penalties are there when a buyer wants to go for a favorable refinance of his mortgage.

Escrowing of taxes and insurance- The new law asks for escrowing of tax and insurance from the buyer.

All Loans
Some changes will effect all the loans

• Disclose or reduce broker incentives
• Appraiser should appraise the right and correct value of the property
• No unfair practices from the loan servicer
• More disclosure by the lenders

All these will benefit the home buyer if they come into force.