U.S. regulator toughens subprime mortgage rules

Deceptive lending practices lured some U.S. buyers to purchase homes they now can't afford.(Ted S. Warren/Associated Press)

The U.S. Federal Reserve Board has approved a rule that prohibits unfair, abusive or deceptive home mortgage lending practices for subprime loans, the agency said Monday.

Such practices have been identified as one cause of the U.S. mortgage meltdown that has led to forced sales, and financial and stock market turmoil among lenders and mortgage companies.

Deceptive lending practices lured some U.S. buyers to purchase homes they now can't afford. As those homes come on the market, they are forcing down real-estate prices, leaving other homeowners without enough equity to keep their houses.

The new rule amends the fed's Regulation Z (Truth in Lending). As well as prohibiting deceptions, it sets ad standards and requires the lender to disclose certain information earlier in the transaction.

"Advertising rules now require additional information about rates, monthly payments and other loan features. The final rule bans seven deceptive or misleading advertising practices, including representing that a rate or payment is 'fixed' when it can change," the Fed said in a release.

The rule adds four limits on lenders who make higher-priced mortgage loans:

Prohibit a lender from making a loan without regard to a borrower's ability to repay the loan from income.Require creditors to verify the income they rely on to determine repayment ability.Ban any prepayment penalty if the payment can change in the initial four years.Require creditors to establish escrow accounts for property taxes and homeowners insurance for certain mortgage loans.

The limits will make it more difficult for lenders to deceive borrowers about the real cost, and of their mortgage and their ability to repay it.

Other rule changes are intended to ensure homes are appraised at their true value.

The new rules take effect Oct. 1, except for the escrow requirement. It will be phased in during 2010 to allow lenders to establish new systems.

The rule will apply to all mortgage lenders, not just those supervised by the Fed, Fed chairman Ben Bernanke said in a release.

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