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The Financial Stability Act's Impact on Home Equity Loans

[May 23, 2010.]


Restoring American Financial Stability Act 2010

On May 20, 2010, the Senate passed sweeping reforms on the financial industry. This will impact mortgage lending, including home equity loans. The objective is to protect consumers by limiting the risks and abuses of the past. The legislation adds oversight that might have prevented the recent near-collapse of the economy. It may tighten credit further as borrowers are required to prove they can repay the money they borrow. The process of transitioning from the loose and risky policies of the past to more transparent and accountable policies of the future may be difficult.

A Summary of What the Act Does

  • Creates a new watchdog (Consumer Financial Protection Bureau) housed at the Federal Reserve designed to make sure American consumers get good information when it comes time to take out a mortgage.
  • Gives the Federal Reserve authority over holding companies with assets over $50 billion.
  • Creates a new way to liquidate failed financial firms and increases capital requirements making it undesirable to become "too big to fail."
  • Creates a new council (Financial Stability Oversight Council) to watch for systemic risks and warn ahead of time about any activity that threatens the stability of the economy.
  • Derivatives, asset-backed securities, hedge funds, mortgage brokers, and payday lenders must now be transparent and accountable, and no more loopholes will allow risky exotic instruments.
  • Provides for better bank supervision.
  • Gives shareholders a say on executive compensation.
  • Creates the Office of National Insurance under the Treasury to monitor the insurance industry.
  • Makes new rules for rating agencies to protect investors.
  • Companies that sell products like mortgage-backed securities will be required to hold a portion of the risk on their own portfolios.
  • Increases enforcement of the rules already on the books that have been abused by special interest groups.

Home Equity Loans May Change

One way this new legislation is likely to change home equity loans is to increase the guidelines for qualification. Whereas in the past, home equity loans were often approved based on credit score and loan to value ratio (LTV), proving income may now be more important. Ordinarily, second mortgages such as home equity lines can be approved with higher debt to income (DTI) ratios than first mortgages. Lower DTIs on home equity loans would not be surprising once the new legislation goes into effect.


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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