Reactions to the Fed's Subprime Solution

The Fed's proposal is "too little, too late," says consumer advocate Gerri Detweiler, author of The Ultimate Credit Handbook and the education director for FreeRateSearch.com, a mortgage search engine. "An estimated one-third to one-half of subprime loan holders could have qualified for better 'Alt A' or 'non-prime' loans. In addition, however, our review of our database of subprime loan rates and programs over the past two years showed that even subprime borrowers could have obtained less risky fixed rate loans for about the same monthly payment -- and sometimes even less."

The Fed's proposal, among other things, is supposed to prohibit seven misleading or deceptive advertising practices for some loans by requiring that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates. But Detweiler says that it does not significantly change how lenders user "lowball" rate quotes to lure borrowers in.

"While it sounds perfectly logical for lenders to be required to verify income and assets, a bigger problem is making sure lenders provide accurate loan information that borrowers can verify independently," Detweiler says. "Until that happens, we'll continue to see borrowers stuck with bad loans."

Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z

The proposal would establish a new category of "higher-priced mortgages" that should include virtually all subprime loans.

The proposal would, for these loans:

Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

Prohibit a lender from making a loan by relying on income or assets that it does not verify.

Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

Prohibit certain servicing practices, such as failing to credit a payment to a consumer's account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.

Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term "fixed" to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates.

Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Source: Federal Reserve