UPDATE 1-US Fed sets mortgage disclosure, compensation rules

(Adds details, background on mortgage rules)

WASHINGTON, Aug 16 (BestGrowthStock) – The Federal Reserve on
Monday published new rules aimed at protecting consumers from
abusive mortgage practices, including clearer cost disclosures
and a ban on payments to mortgage brokers for steering
borrowers into loans with higher interest rates.

The Fed said it would ban payments from lenders to brokers
based on interest rates paid by borrowers or other loan terms.
The final rule, which takes effect on April 1, 2011, will end
the so-called “yield spread premium” payments blamed for
pushing millions of borrowers into unaffordable loans.

It also prohibits loan originators from “steering”
consumers into mortgages that increase payments or bonuses to a
broker or loan officer.

“This will prevent loan originators from increasing their
own compensation by raising the consumers’ loan costs, such as
by increasing the interest rate or points,” the Fed said.

The Fed also issued a new interim rule that requires
lenders to provide consumers with clearer disclosures about
their loan costs, including a table that states the maximum
interest rate and payment that can occur during the first five
years of an adjustable-rate mortgage and a “worst case” example
showing the highest possible maximum rate and payment over the
life of the loan.

Lenders must also warn consumers they may not be able to
refinance their loan in the future to avoid higher interest
rates, the Fed said.

Many consumers were lured into “exotic” adjustable rate
mortgages with hefty balloon payments by brokers who advised
them that these loans could be refinanced in two years — an
option that vanished when housing prices collapsed.

The Fed is taking public comments for 60 days on the
proposed rules, but said it intends for lenders to comply with
them for all applications received after Jan. 30, 2011.

Although the Fed received massive criticism for lax
mortgage disclosure rules in the wake of the financial crisis,
most of the interim and final rules issued on Monday were in
development well before last month’s passage of landmark
financial reform legislation by Congress.

The reform bill will require another round of rulemaking on
mortgages by the new Consumer Financial Protection Bureau,
including a new, common simplified mortgage disclosure
statement that must be in place within two years.

Other new rules issued by the Fed on Monday include a final
rule requiring that borrowers receive notice of a sale or
transfer of their loan and proposed rules on disclosures of
reverse mortgages.

It also proposed raising the interest rate threshold for
requiring tax and insurance on so-called jumbo loans to 2.5
percentage points above the prime offer rate from 1.5 percent
above prime. Jumbo mortgages are larger loans that exceed the
Freddie Mac (FMCC.OB: ) conforming loan purchase limit.
(Reporting by David Lawder; editing by Todd Eastham)

UPDATE 1-US Fed sets mortgage disclosure, compensation rules