The Federal Reserve announced rules aimed at preventing mortgage originators from receiving more compensation for selling home loans with higher interest rates.
"A loan originator may not receive compensation that is based on the interest rate or other loan terms," the Fed said Monday. "This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs," the Fed said as part of five final, interim or proposed rules released in Washington to combat unfair or abusive lending.
The proposals are part of the central bank's ongoing effort to fix weaknesses in mortgage finance, including compensation practices, which undermined lending standards and prompted excessive risk-taking last decade. Lawmakers including Senate Banking Committee Chairman Christopher Dodd have criticized the Fed in recent years for failing to adequately regulate mortgage lenders prior to the financial crisis.
The Fed proposed rules pertaining to so-called jumbo mortgages, home loans exceeding the loan-size limits for purchase by the government-sponsored enterprise Freddie Mac, and issued a final rule to require that consumers receive notice when their mortgage loan is sold or transferred.
The central bank proposed changes to the "Truth in Lending" rules that would require increased and clearer disclosure on reverse mortgages and boost protections that allow consumers to rescind a mortgage contract.
The move is "the second phase of the Board's comprehensive review and update" of the broad set of mortgage rules under the Truth in Lending regulations, the Fed said. The first phase began with the publication of proposals in 2009.
An interim rule released yesterday requires increased disclosure by mortgage lenders, calling on them to provide borrowers with a table showing more detailed terms of mortgages.
The table must show the initial interest rate and monthly payment. For adjustable rate loans, the lender must disclose the maximum payment that can occur in the first five years and the "worst-case" scenario that can occur over the life of the loan. Features like balloon payments must be disclosed. Lenders must comply with the new disclosure rule by Jan. 30.
