Fed Plans to Tighten Mortgage Lending Rules

Stricter rules will face mortgage lenders if a Federal Reserve proposal unveiled today moves forward. The Fed wants to prohibit or limit prepayment penalties, force lenders to make sure borrowers set aside money for taxes and insurance, require lenders to verify income, and prohibit lenders from giving borrowers unaffordable loans, the AP reports.

The Fed also will try to aid consumers by simplifying financial disclosures and cracking down on mortgage advertising. Although the rules likely will cover loans made by all lenders, it’s specifically aimed at protecting subprime borrowers. Nearly 5% of subprime ARMs in the third quarter were in foreclosure, with 18.81% past due. The proposals must be aired for public comment before becoming law. (More Federal Reserve stories.)