Fed Unveils Rules to Protect Borrowers

[SoCalDem]

http://online.wsj.com/article/SB124837547483376651.html

* JULY 24, 2009

Fed Unveils Rules to Protect Borrowers


By JESSICA HOLZER

WASHINGTON -- The Federal Reserve on Thursday proposed sweeping new consumer protections for mortgages and home-equity loans. The proposals seek 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.


Fed staff, which drafted the proposals, based the new disclosures on extensive consumer testing. "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 moves come as the Fed defends its consumer-protection record. The Obama administration and key congressional Democrats want to remove the Fed's consumer-protection authority and place it with a newly proposed regulatory agency. It is unclear what would happen to the new Fed rules under such an agency.

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. 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 proposing that lenders provide clearer information on how borrower payments might change under ARMs. And it wants to revise how the annual percentage rate, or APR, is calculated in disclosures to reflect several routine costs that are passed on from the lender to the borrower, such as title insurance.
Full Disclosure

Under proposed rules, mortgage applicants would get:

* A one-page Q&A document explaining risky features of a loan
* Streamlined early cost disclosures
* A revised annual interest rate that includes most fees and costs
* A graph showing borrowers how their rate compares with rates of borrowers with excellent credit
* In addition, side payments for steering borrowers to higher-cost or riskier loans would be banned.

Home-equity loan applicants would get:

* A one-page document explaining the risks of the loan
* Cost disclosures specific to their loan
* In addition, lenders would have to notify borrowers 45 days before changing terms of a loan.

Fed Senior Counsel Kathleen Ryan said the change could lower costs for consumers by encouraging lenders to put downward pressure on such third-party fees.

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