Federal bank regulators on Tuesday published a new set of forms designed to give borrowers a better understanding of mortgages that can adjust to dramatically higher monthly payments.
With mortgage defaults rising among U.S. borrowers, consumer advocates say many lenders encouraged consumers to focus on the initial low-rate “teaser” period without fully informing them that their loan payments could jump up in the future.
The disclosure forms published by the Federal Reserve and the other four federal agencies that regulate banks, thrifts and credit unions are intended to give consumers clear information about the risks of adjustable-rate home loans.
One sample form gives borrowers an explanation of features common to adjustable rate mortgages, while another form compares payments under a traditional fixed-rate mortgage compared with an adjustable rate one.
Kirsten Keefe, founding director of Americans for Fairness in Lending, an umbrella group of consumer organizations, said the disclosures are an improvement over current ones but are no substitute for a new federal law that would ban specific unfair lending practices.
Many consumers, she said, are faced with a stack of confusing disclosures when they obtain a loan and rely on advice from real estate agents and mortgage brokers.
“The best disclosure will never replace regulations,” Keefe said, “What’s really needed are laws and regulations that get rid of abusive terms in adjustable rate mortgages.”
In addition to the Fed, the agencies that developed the new forms are the Federal Deposit Insurance Corp., the National Credit Union Administration and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision. Comments on the proposal are due Oct. 15.
These banking regulators in July also completed guidelines that call on lenders to strictly evaluate borrowers’ ability to repay home loans.
Mortgage lenders such as Countrywide Financial Corp. and Washington Mutual Inc. package many of their home loans into securities and sells them to investors, but the market for those investments has dried up because of rising defaults and a slumping housing market.
Lenders are not required to use the new forms and are free to alter or design them as they see fit. However, banking institutions generally follow the regulators guidelines, which only apply to federally supervised institutions, not state-regulated ones.
If they do not use the baking regulators’ forms, lenders would have to ensure that their own disclosures and marketing materials provide “clear and balanced” information, federal regulators said in a notice published Tuesday in the Federal Register.
Earlier this year, the Federal Trade Commission concluded that many borrowers failed to understand loan terms after reading the current disclosure forms and recommended those forms should be replaced.