Consumer Law

Fed Tightens Subprime Mortgage Rules

By Alan White

By Alan White

While I haven't digested the full rule, it seems that the Fed's final unfair mortgage practices rule (press release with link to Federal Register text) is stricter than initially proposed in at least two key areas. The proposed rule would have prohibited subprime mortgage loans made without regard to repayment ability, but lenders would have faced liability only if their conduct constituted a pattern or practice. The final rule drops the pattern or practice requirement, and requires the lender to evaluate the borrower's ability to make the highest payment scheduled during the first seven years of the mortgage.

The proposed rule had very limited consumer protections regarding prepayment penalties. The final rule will bar prepayment penalties for any loan that permits any change in the scheduled payment during the first four years, and limits prepayment penalties for all subprime loans to the first two years of the loan.

Other aspects of the proposed rule were withdrawn, and generally speaking the message from the Fed seems to be that if and when a subprime mortgage market re-emerges in the U.S. it will be a much more strictly regulated market. Expect industry commentary to be unfavorable, if not apocalyptic.

Full post as published by CL&P Blog on July 14, 2008 (boomark / email).