The Federal Reserve on Thursday approved proposals designed to make it easier for Americans with mortgages, or shopping for them, to better understand how the loans work.
The action comes after lax lending and, in some cases, borrowers who didn’t fully understand the terms of their home loans, ended up buying houses that they couldn’t afford. That contributed to the worst collapse in the housing and mortgage markets in 70 years.
“Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,” said Fed Chairman Ben Bernanke. “It is often said that a home is a family’s most important asset, and it is the Federal Reserve’s responsibility to see that borrowers receive the information they need to protect that asset.”
Among the changes, mortgage lenders would need to explain potentially risky features, such as prepayment penalties, of a mortgage in a one-page “plain-English” question-and-answer format before a consumer applies for a loan. Improved disclosure of the annual percentage rate, or APR, to capture most fees and settlement costs paid by the borrower also would be required.
For customers with adjustable-rate mortgages, lenders would be required to show consumers how their payment might change. For instance, by disclosing the highest monthly amount the borrower might pay during the life of the loan. Lenders also would have to notify customers 60 days in advance — versus the current 25 — of a change in their monthly payment.
Lenders would have to provide a monthly statement of payment options for customers with payments that don’t cover the interest on the loan. That increases the loan balance by the amount of the unpaid interest. The monthly statement would explain the impact different payment options would have on the loan balance.
The proposal would ban certain payments to mortgage brokers and loan officers that are based on the loan’s terms or conditions. It also would prohibit steering consumers to transactions that aren’t in their interest but would lead to increased compensation to the brokers and officers.
Michael Calhoun, president of the Center for Responsible Lending, a nonprofit group that fights abusive financial practices, hailed the Fed’s proposal.
“As with broker kickbacks, African Americans and other people of color bore the brunt of unfair steering practices,” he said. The Fed’s plan holds “great promise for eliminating abusive and unfair practices that have become commonplace in the mortgage industry.”
John Courson, president of the Mortgage Bankers Association, called the proposals “dramatic,” but said the trade group will work to “ensure that potential borrowers have a crystal clear understanding of their loan without making the process more burdensome than it has to be for either the borrower or the lender.”
The Fed also proposed bolstering disclosures on home-equity lines of credit. Those changes include prohibiting a lender from terminating a customer account for delinquency until the payment is more than 30 days late.
The banking industry said it welcomed the efforts but was uncertain whether the Fed’s plan would lead to better-informed borrowers. “The voluminous proposals may not meet the goal of assisting consumers to more fully and easily understand the costs of credit,” said Robert Davis, executive vice president for mortgage markets and financial management at the American Bankers Association. “The objective of the final rule should be both to clarify and simplify.”
The Fed’s proposals ran more than 600 pages each.
Members of the public, lenders, industry groups and other interested parties have 120 days to comment on the proposals. After that, the plans could be revised and will be subject to additional consideration by the Fed before any final version is voted on.
To help shape its proposals, the Fed reached out to consumers to get a better grasp of how they gather information on mortgages, disclosures that they find useful and information they think is confusing.
“Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply,” said Fed member Elizabeth Duke, the central bank’s point person on the proposals.