Speaking at the Federal Reserve open meeting on mortgage rules, Federal Reserve Chairman Ben Bernanke said the new rules will be aimed at protecting consumers from deceptive practices.
Bernanke said that the new rules would apply to all mortgage lenders, as delinquencies and foreclosures continue to grow rapidly. Bernanke pointed to deceptive practices as the key reason for the inappropriately high cost of loans.
"It seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high cost loans that were inappropriate for or misled borrowers," Bernanke said.
The new rules ban prepayment penalties on mortgage loans whose payments can change during the first four years, and will instead be limited to the first two years.
Prepayment penalties are fees banks can charge borrowers who pay off loans earlier. This is usually done by borrowers who want to refinance a loan into one that charges less interest.
Federal Reserve Governor Randall Kroszner, in attendance at the meeting, said that the new rules alone would not be sufficient to end the crisis.
"These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system," said Kroszner.
By Steve Stecyk and edited by Cristina Markham