Fed Board Recommends Tighter Curbs on Subprime Loans

The Federal Reserve Board voted unanimously to propose new restrictions on subprime mortgages, including a ban on low-documentation loans and limits on penalties for borrowers who prepay their debts.

The Fed governors voted in favor of tightening restrictions on so-called pre-payment penalties, requiring the escrow of taxes and insurance, and banning loans made without verification of income or assets. New rules would make lenders responsible for determining whether their customers can afford a loan after the initial interest rate resets.

The Board approved prohibiting lenders from paying brokers fees [e.g. rebates for higher interest rate loans] in excess of what the borrower agreed the broker should receive. The proposal bars coercion of appraisers, and defines seven advertising practices as misleading or deceptive.