Fed Unveils Slew of Mortgage Rules

The Federal Reserve recently unveiled a slew of rules aimed at protecting consumers from abusive lending practices blamed for luring millions into unaffordable home loans.

The rules include a ban on yield-spread premiums, controversial payments that mortgage brokers have historically received in exchange for guiding consumers toward higher-interest rate mortgages. “This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points,” the Fed said.

The ban, set to take effect April 1, would apply to both mortgage brokers and the companies employing them. It also would prohibit loan originators from steering consumers toward loans that aren’t in their best interest but would generate stronger returns for brokers or loan officers. Loan originators would be able to continue receiving compensation based on a percentage of the loan amount.

The Fed says the rules unveiled were being formulated long before historic reforms to the financial sector regulation were passed last month. That legislation includes provisions similar to the yield-spread premium ban unveiled by the central bank on Monday but also covers some loan-origination practices that the Fed’s rules don’t address.

The Fed said Monday that it would require borrowers whose mortgages are sold or transferred to be notified of the changes.

It also proposed that lenders clearly tell borrowers what their mortgage could cost them in a “worst-case” interest rate scenario.

In addition, the Fed rules would require lenders to tell borrowers when balloon payments or minimum payment options could hike loan amounts, and disclose how payments could fluctuate for borrowers who have adjustable- or step-rate loans.

The legislation passed last month includes provisions similar to the rules unveiled by the Fed, but also covers some practices the Fed’s rules don’t address.