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Wednesday, July 16, 2008

Fed Issues New Lending Rules

From a recent Associated Press story, comes this news. The Federal Reserve on Monday of this week adopted rules designed to protect home buyers from the kind of loans that drove many into foreclosure.

The new rules apply to all lenders and not just to banks supervised by the Fed. Most are expected to take effect Oct.1, 2009. Escrow requirements won’t go into effect until April 1, 2010.

Here are the new requirements:

- Prevent loans made without documenting borrower’s income.

- Require lenders to escrow money to pay taxes and insurance for risky borrowers.

- Limit and in some cases ban prepayment penalties.

- Prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value.

- Require mortgage advertising to contain information about rates, monthly payments and other features of the loan.

- Insist lenders credit a mortgage payment to a home owner’s account on the day it is received.

- Brokers and others are forbidden from "coercing or encouraging" an appraiser to misrepresent the value of a home.

Granted, about half of these new Fed rules fall under the "Well, DUH!" rule (a rule made up by the same people who authored the “5 second rule” for dropped food). I have long suspected that requiring that the borrower had a job or some visible means of support is a good thing.

Hopefully new rules like these, combined with the spanking that the financial institutions took over the last two years will be enough to discourage future bad lending practices. Now, if they could just come up with something to encourage the banks to make more good loans that might help get things rolling again.

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