State Cracking Down on Mortgages

New mortgage rules have been finalized in Pennsylvania as state officials try to prevent a repeat of some of the risky lending practices that led to the foreclosure crisis.

The rules require mortgage companies to document a borrower's ability to repay a loan and require lenders to make extra efforts to disclose complex loan features that might make loans hard to repay.

The rules are part of a new state banking regulation that became official March 20, and mortgage companies have 90 days to begin complying. Violators will face fines up to $10,000. Department of Banking officials say the fines are among the stiffest in the country.

"These rules will help to ensure that Pennsylvanians get mortgages that they can understand and repay," Secretary of Banking Steven Kaplan said in a news release.

Under the documentation rule, mortgage companies will now have to document a borrower's income, fixed expenses and other relevant financial information that proves they have the ability to repay the loan.

The information must be kept in a loan file so that state banking officials can examine it during their periodic reviews of mortgage companies. Banking officials generally inspect mortgage files every 18 to 24 months, department spokesman Dan Egan said. "So when we go in there, we're going to be looking at the files to see if they're doing this, and if they're not, that's when the fines will kick in," Egan said.

Under the disclosure rule, lenders will have to use a one-page, state-approved form that calls attention to features that a borrower might otherwise overlook or be confused by. Those features include balloon payments or pre-payment penalties that can cause payment rates to increase or make it hard to refinance. "We're trying to draw attention to certain features that impact the long-term affordability of the mortgage," Egan said.

Work on the new banking regulation dates back several years to when lawmakers began focusing on "predatory loans" that have hidden costs and often target consumers with below-average credit. The foreclosure crisis created more urgency to establish the new rules. While banking officials finalized the regulation, lawmakers also approved a five-bill package last year aimed at protecting borrowers.

Those new laws include measures that make more information about mortgage companies publicly available, increase the penalty for appraiser misconduct, and give the Pennsylvania Housing and Finance Agency more ability to monitor troubling trends.

Credits: “The Daily News” March 31, 2009