Government continues to react to the turmoil in the mortgage market. The latest to take action is the Federal Reserve, which voted unanimously to endorse a new set of regulations aimed at protecting homeowners from abusive lending practices. The new guidelines range from a ban on low-documentation loans to limiting penalties for borrowers who prepay their debts.

"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," said Federal Reserve Chairman Ben S. Bernanke in a statement. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated."

"Unfair and deceptive practices have harmed consumers and the integrity of the home mortgage market," added Federal Reserve Board Governor Randall S. Kroszner. "We have listened closely and developed a response to abuses that we believe will facilitate responsible lending."

The proposal includes the following protections:

  • Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers' ability to repay the loan.
  • Creditors would be required to verify the income and assets they rely upon in making a loan.
  • Prepayment penalties would be permitted only if certain conditions were met, including the condition that no penalty would apply for at least sixty days before any possible payment increase.
  • Creditors would have to establish escrow accounts for taxes and insurance.
  • Lenders would be prohibited from compensating mortgage brokers by making payments known as "yield-spread premiums" unless the broker previously entered into a written agreement with the consumer disclosing the broker's total compensation and other facts. A yield-spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer's written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
  • Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home's value.
  • Companies that service mortgage loans would be required to credit consumers' loan payments as of the date of receipt and would have to provide a schedule of fees to a consumer upon request.

Bernanke said that once adopted, the new rules would apply to "all mortgage lenders, not just those supervised and examined by the Federal Reserve."