The Federal Reserve's Board of Governors is expected to endorse proposed rules developed by its staff for the banks it regulates that would end some of the more abusive lending practices aimed at subprime borrowers.

The rules which have been widely promoted by consumer advocacy groups for some time and already adopted in whole or in part by many state regulatory agencies would, if enacted, do the following:

  • Restrict lenders from penalizing borrowers with low incomes or poor credit by enforcing unreasonable prepayment penalties. While the rules will not prohibit such penalties they would have to expire at least 60 days before any rate adjustment.
  • Require that lenders set up escrow accounts and collect monthly payments from subprime borrowers to be used toward insurance and property tax payments.
  • Eliminate so-called no-document or stated income loans where borrowers do not have to provide proof of the income they claim to have.
  • Force lenders to take into consideration the borrowers ability to pay the mortgage without pegging that ability to increasing home values.

Also under consideration are rules that would require financial institutions to disclose loan costs and terms to borrowers much earlier in the mortgage process and would prohibit fees except for those to obtain credit reports until after such disclosures are made. The Fed may also propose barring lenders from paying a commission or fee to mortgage brokers that is higher than the amount the borrower had agreed to in advance that the broker would receive.

These rules, of course, are aimed at future loans and would do nothing to assist those borrowers who are already in danger of losing their homes because of predatory lending practices or because they did not understand the loan process. The proposed rules must undergo a lengthy period of public comment before being voted on again by the Board of Governors.