Fed Issues Mortgage Disclosure Rules

Last week the Federal Reserve Bank issued new rules designed to protect consumers from unfair and deceptive mortgage lending practices.   The new rules go into effect in April 2011.

Mortgage brokers may no longer receive compensation based on the interest rate that the consumer receives on a loan, a practice called “yield spread premiums.”  This practice led to bait and switch practices where borrowers were offered one rate initially and then forced into a higher rate at the end. This practice was blamed for leading homeowners into high cost, unsustainable mortgages.

Loan originators may no longer accept compensation both from the Borrower and from the Lender.  They must also refrain from advising clients into loans that are not in the Borrower’s best interest.

For variable rate loans mortgage brokers will need to present to clients a table that shows the “worst case” scenario on what the interest rates could do to mortgage payments.

As of January 2011 consumers must be notified within 30 days of any sale or transfer of their mortgage to another Lender.  Notification must also take place when key terms of the loan are changed.