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Fed Proposes Minimum Standards for Home Loans

May 7th, 2011 9:23 AM by Lehel S.

During the housing boom, many lenders and mortgage brokers didn’t operate with consumers’ best interest in mind.

They enabled and sometimes encouraged borrowers to take out loans with interest rates that shot upward after an introductory period — even ones in which the principal balance rose over time.

The Dodd-Frank financial overhaul passed last year aims to prevent these practices from coming back, mandating that lenders ensure that all borrowers have the ability to pay back their home loans.

As required by the Dodd-Frank law, the Federal Reserve on Tuesday proposed a set of minimum standards for home lending, creating an “ability-to-repay” requirement for most home loans, as part of an effort to make sure that U.S. lenders don’t return to the shady practices of the housing market boom. (See the highlights.)

Lenders would be able to meet that standard by verifying the consumer’s income or assets or making a “qualified mortgage” that requires the lender to calculate the maximum interest payment in the first five years.

Loans that meet that standard would have protections against lawsuits. They also would have restrictions on fees and would not allow the principal balance to grow.

The Fed also provided two more options for satisfying the “ability-to-repay” standard. Those affect lenders refinancing mortgages with risky features and those in rural and other underserved areas.

The Fed is seeking comments on the proposal by July 22. However, the central bank will not complete the process, as its authority over mortgage lending rules is scheduled to transfer to the new Consumer Financial Protection Bureau on July 21. At that point, the consumer bureau is charged with taking over the proposal.

Posted in:General
Posted by Lehel S. on May 7th, 2011 9:23 AM



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