Fed Aims to Establish Minimum Standards for Mortgage Lending
The
mortgage crisis and near housing market collapse forced the federal government to take a hard look at a system of securitization that encouraged mortgage lenders to push borrowers into home loans that they might not be able to afford.
Securitization protected banks and lenders from liabilities or financial repercussions if a homeowner defaulted on their loan. Instead, investors (or in case of government-backed securities, the federal government) would shoulder the weight of those losses. Lenders were free to sign off on home loan mortgages and make big bucks on selling them to securities.
Obviously, the mortgage crisis proved that the system was flawed, allowing lenders to act selfishly without having the interest of the consumer in mind.
Last year, President Obama signed into law a bill that over the next decade will enact a sweeping reform of the nation's financial systems. Known as the
Dodd-Frank Wall Street Reform and Consumer Protection Act, the bill is intended to promote transparency and accountability within the financial system, and establish regulations to protect consumers from abusive financial practices.
One of the statues of the Dodd-Frank requires the Federal Reserve to put in place a set of rules and regulations for responsible mortgage lending. These regulations will force mortgage lenders to comply with minimum standards of mortgage lending, requiring them to make sure the consumer has the financial ability to pay off the loan. The process will include income and assets checks and a restriction on fees.
Loans in compliance with the standards will be protected from lawsuits. On the other hand, if the loan is proven to not be in compliance the consumer will have the right to sue their mortgage lender.
Though the Federal Reserve is beginning the process of drafting the minimum requirements, the final legislation will be written and decided by the Consumer Financial Protection Bureau, which is slated to launch this summer.
By: Javi Calderon
