On Monday, the Federal Reserve finally approved a plan to correct lending policies that previously had led borrowers down a path to foreclosure and loan defaults. These new policies will take effect on Oct 1, 2009 for all new loans, so it will be awhile before a halt will be seen in the ever increasing rise of problems with the mortgage market.

Just to recap, some big changes in the lending policies will be making lenders unable to make loans without borrower proof of income, or to borrowers without money reserved to pay taxes and insurance. The lenders must evaluate the borrower´s ability to repay the loan, without necessarily using the home value as collateral.

With the new policies, lenders must also have clearer advertising, with disclosures given to the borrowers early in the loan process. All ads must include information on rates, monthly payments and additional loan details.

Lenders will also be halted on penalizing subprime borrowers. These are borrowers who had bad credit, that then pay off their loans early. Usually these types of prepayments are banned if the payment amount is able to change in the first 4 years of the mortgage. With other situations, a penalty is not able to incur in the first 2 years of a mortgage.

Many are against the idea of prepayment penalties, as it forces borrowers to be in a loan they don´t want or do not need to be in. Mark Flannery, a finance professor at the Univ. of Florida, commented on these practices saying, "We know there was a lot of fraud that went into the current mortgage crisis and we know there were a lot of misinformed borrowers, and this goes a long way to addressing both of those issues,".

Others, while glad that a plan is finally taking effect, feel that this should have occurred a long time ago. A staff attorney at the Nat. Consumer Law Center, Alys Cohen, stated that "Regulators have known about these issue for at least a decade." and "If either Congress or the Fed had created strong origination rules years ago, things would not be as bad as they are now,".