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The Fed is Finally Working Towards Transparency in Mortgages

On Monday, Fed Chairman “Big Ben” Bernanke announced that the Board had approved a final rule to amend Regulation Z (Truth in Lending).  In a prepared statement, Bernanke announced that the changes are “intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership.”  He also noted that the rules will apply to all mortgage lenders.

As written, the plan will, among other things, do away with no-income verification loans, limit (or ban) prepayment penalties, require lenders to consider the borrower’s ability to repay the loan, and require mortgage advertising to contain information about rates, monthly payments and other features.

I have to give the Board another pat on the back for one crucial decision that they made as part of the amendment process.  As reported by Sue McAllister in Mercury News, the Fed did decide not to support the proposal that yield spread premiums (YSP) be eliminated-although they will review alternatives that will prevent excessive broker fees.

These rules, most of which will take effect on October 1, 2009, are a good first step.  And it was a good call not to get rid of YSPs.  But you know what?  In my book, they still missed the point.

The best way to protect consumers is for lenders to provide them all of the information about their loan-including all of the pricing information-in a way that they will understand.  In other words, the entire process must be made absolutely transparent.

Making the loan process transparent will allow the YSP to serve the purpose for which it was originally designed: to help consumers get the loan that works best for them.  The YSP can be a huge help for people who qualify to buy a home, but need a little help with the closing costs.  And it also provides a way for them to “buy down” to a lower rate to maximize their savings both monthly and over the term of the loan.  Getting rid of the YSP only harms the consumer it was meant to assist.

Without this transparency, however, there will always be the opportunity for a mortgage broker to take advantage of his customers by manipulating the YSP to his advantage-and offering only those rates and programs which will put the money in his pocket.

Mr. Bernanke, I congratulate you and your colleagues on taking a step in the right direction.  Now, keep on going.

This blog is intended for informational/entertainment purposes only and is not meant to provide any financial or legal advice.