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Trying to curtail practices that would make Mr. Potter look like a benevolent spirit, federal regulators have tightened the guidance on mortgage brokers. The guidance is fairly simple, and should have been given years ago, do not base qualifying for a loan on the teaser rate, but on the rate when the loan matures.

This was not so bad when most loans were either fixed or 5/1 or 7/1 ARMs. But now that a large majority of loans written in states such as California are Interest Only or 3/1 loans, they act as more of a honey trap to homebuyers. All I can say is that is it is about time.

Regulators are trying “to add some discipline to the lending process,” said Richard Wohl, president of Pasadena-based Indymac Bank. “Whenever you do that, you’re going to have some [borrowers] that won’t have the product available to them.”

The tougher standard was issued in the form of “guidance” from the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve and other regulators. Guidance has less force than a regulation and provides no specific penalties for violation.

The regulators, however, say they will “carefully scrutinize” lenders to see whether they are following the new rules. Those who fail to do so, the guidance summary warns, “will be asked to take remedial action.” via the  Los Angeles Times.

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