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Financial Regulatory Reform

Mortgage Reform for Borrowers

New law requires "lenders to do more," restricts prepayment penalties

Now under new mortgage reforms, supported by AARP and signed into law in July 2010, an experience like the Jacksons' should be a thing of the past, experts say.

Most important, under the new law, lenders are required to verify a borrower's income and assets to ensure that they will be able to pay off the loan, even after any interest rate adjustment occurs. Traditionally, that often didn't happen. Instead, it was common for lenders to initiate so-called stated income loans, in which they relied on a borrower's testament of their income and did not take steps to verify earnings.

"At one point, people said all you needed was a pulse to get a loan," says Norma P. Garcia, a senior attorney at Consumers Union who's been advocating for mortgage reform since the 1990s. "The law requires lenders to do more to make sure that borrowers will actually be able to repay the loan."

In addition, the recent reforms eliminate incentives to mortgage brokers for steering people toward more expensive loans than they could qualify for. And prepayment penalties will be prohibited in most cases.

"The safety net had a lot of holes in it, and the lenders took advantage of that and consumers were the ones who suffered," Garcia says. "This is long overdue."

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