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Regulations of Home Equity Loans Are Likely to Change

[Jul 19, 2010.]


Mortgage reform has been a top priority for Congress since the beginning of the collapse of the housing sector of the economy in late 2007. No credit check loans and no income documentation loans hit their peak in popularity in about 2005. Once sub-prime borrowers started to default in great numbers, it didn't take long for the housing sector of the economy to come tumbling down.

Nearly three years later, The Wall Street Reform and Consumer Protection Act has been enacted. The new law affects almost all financial products sold to the public, including home equity loans.

A Summary Of The Changes The New Law Could Bring

  • Minimum standards for making a mortgage loan. A lender must verify that the borrower has the ability to repay the loan. This means no more no credit check loans or no income documentation loans. Income, assets, and credit must be verified.
  • Prohibition of pre-payment penalties on traditional loans and on complex loan products. In the past, home equity loans had a pre-payment penalty of at least a year in many cases. This practice by lenders will come to an end.
  • A new Consumer Financial Protection Bureau will be created. The bureau will be tasked with developing and implementing new rules that regulate most all financial products sold to consumers.
  • Mortgage lenders will have to keep 5% of loans with riskier features on their books. they'll be able to offer such loans but will not be able to offload all the risk.

Shopping For New Home Equity Loans Should Be Safer

One of the ways the new law will affect home equity loans is to increase the lender's duty to properly disclose information regarding the interest rate and total loan costs up front. Tolerance for variations between how a loan is disclosed and how it actually funds have tighten considerably in recent months. The new Good Faith Estimate And Truth In Lending disclosures must meet minimum tolerance levels when compared to the Final HUD-1 closing cost statement. Lowering tolerances for variations will make shopping for home equity loans safer.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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