Choosing and securing a mortgage is a very confusing process. In July of 2008, the Federal Reserve Board approved rules to better protect consumers by improving the communication process with a truth in lending provision.
Truth in lending is also known as Regulation Z. It was a response to the numerous mortgage defaults in the recent real estate market bust. The Board of Governors of the Federal Reserve System acknowledged the four key provisions of the recently amended regulation that:
- “Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
- Require creditors to verify the income and assets they rely upon to determine repayment ability.
- Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
- Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.”
All the rules involved in the truth in lending provision are forcing lenders to be open and honest in the terms of the loans they are providing for consumers. Mortgage lenders must now adhere to national advertising standards and provide consumers with good faith estimates to help ensure the protection of the consumer’s rights and to make sure they do are not sold on a loan larger than they can handle.