Fed Proposes Protections for Mortgage, HE Loans

Washington, DC, July 24, 2009--The Federal Reserve has proposed extensive new consumer protections for mortgages and home-equity loans.

The proposals are designed to overhaul the timing and content of disclosures to consumers, and to ban controversial side payments to mortgage brokers for steering customers to higher-cost loans.

"I think the general thrust of this is to make more intelligent shoppers of households, have them make better decisions," Fed Vice Chairman Donald Kohn said at a public meeting Thursday with other Fed officials.

The Fed has come under fire for failing to act until 2008 to rein in lending practices in the mortgage industry -- authority it has had since 1994. Critics also say it dragged its feet on tightening credit-card rules. The Fed placed new restrictions on the industry late last year.
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Under the new Fed proposals, consumers would receive more streamlined cost disclosures after applying for a mortgage loan. Buyers also would be presented with a one-page document, in question-and-answer format, warning about risky loan features such as negative amortization and balloon payments associated with adjustable-rate mortgages, or ARMs.

The Fed is also seeking to replace a stack of generic information given to home-equity loan applicants with a one-page document giving clear information about the risks of such loans. Within three days of receiving an application, lenders would have to furnish consumers with tailored cost information that would enable the consumers to shop for better deals.

Currently, consumers don't receive information about the APR or the credit amount of the loan until after the account is open, Fed staff attorney Lorna Neill said. "This is too late to use this information to shop around," she said.