The Federal Reserve signed off Monday on a long-anticipated plan to end the abusive lending practices that victimized many borrowers in the now-collapsed subprime market.
The rules, however, will only cover new loans, not existing ones, so they will have little effect on the rising tide of mortgage delinquencies and foreclosures across the country. The rules don't go into effect until Oct. 1, 2009.
Among the key changes, the rules bar lenders from making loans without proof of a borrower's income, and require lenders to ensure risky borrowers have reserved money to pay for taxes and insurance. The plan prevents lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value.
Advocates did get the Fed to change its original draft so that borrowers who get a loan they cannot repay can file a lawsuit without having to prove the lender engaged in a similar "pattern or practice" of lending to others without regard to their repayment ability.
A lender, however, can find a "safe harbor" against customer lawsuits by proving it followed certain steps in verifying if the borrower could indeed repay the loan.
"Consumers don't have to prove the whole 'pattern and practice,' but lenders can say, 'Hey, if we follow these straightforward rules, it makes it harder for consumers to sue us for granting a loan they can't repay,'" said Kurt Eggert, a former member of the Federal Reserve Board's Consumer Advisory Council.
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