In July 2008, the Federal Reserve created a new category of mortgage loans in response to the subprime meltdown. These new mortgages are termed "higher-priced loans," and describe characteristics of the type of lending product that had been referred to as subprime mortgages. These new regulations went into effect on October 1, 2009.
The new Federal Reserve regulations dealing with higher-priced loans include protections for borrowers from lenders who make loans without regard to the ability to pay back the money borrowed, as well as prepayment penalties lasting longer than two years, and mortgages without escrow accounts set up.
Also, lenders are prohibited from engaging in a pattern of making loans to homeowners without taking into consideration their ability to repay the mortgage. Obviously, the lenders knew that they would be covered by the federal government if they made loans that would never be paid back, and the Fed is now attempting to limit this practice after the banks have received their initial bailouts.
The Department of Housing and Urban Development (HUD) has also released new regulations regarding the Good Faith Estimate (GFE) and HUD-1 settlement statement that are used in almost all real estate transactions. The new rules are designed to give more accurate disclosures to borrowers and make the paperwork more uniform.
The Good Faith Estimate will now be a standardized form, and lenders or mortgage brokers will be required to disclose the actual costs of the loan to borrowers. Previously, estimates were allowed to be used, but were often low-balled to make the loan look less expensive than it really was. As it got time to close the loan, the estimated fees would dramatically increase.
The HUD-1 settlement statement will also be standardized so that line numbers on the Good Faith Estimate match line numbers on the HUD-1. Loan term information will also now be included on the HUD-1, as well as detailed disclosures of escrow account requirements. A final page of the settlement statement will show how costs have changed from the initial GFE to the final closing.
As the housing crisis continues to get worse, we can all expect more regulations will be released, requiring more paperwork and disclosures to homeowners. Unfortunately, too few borrowers read and understand these disclosures in the first place, and the cost of following such laws are simply passed from the lenders onto the borrowers. It will still be up to homeowners themselves to make absolutely certain they understand how their mortgage product will affect their financial lives.