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Federal Reserve Proposes Truth in Lending Changes

One reason so many homeowners ended up way in over their heads with mortgage loans as the housing market went bust is because they didn’t understand what they were getting into in the first place. In an effort to improve disclosures to consumers about mortgage loans and home-equity lines of credit (HELOC), the Federal Reserve has proposed some significant changes to Regulation Z, or Truth in Lending Act (TILA).

Comparing Mortgages

The proposed changes are aimed at helping consumers compare mortgage products. ”Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,” Federal Reserve Chairman Ben S. Bernanke said in a statement. “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.”

Requirements for Mortgage Lenders

The changes would allow people with closed-end mortgages to receive disclosures about adjustable rates, prepayment penalties, and negative amortization.  Closed-end mortgages are home loans that can’t be fully repaid before the maturity dates. Among the details of the Fed’s proposal:

  • Improve disclosure of the annual percentage rate (APR) of mortgages to include all fees and settlement costs
  • Require that a mortgage lender shows a borrower how the interest rate of his home loan compares to the average rate for people with good credit
  • Require mortgage lenders to provide final TILA disclosures to borrowers at least three days before closing

Adjustable-Rate Mortgages

Other changes would involve information disclosed about adjustable-rate mortgages (ARMs). Mortgage lenders would have to show consumers how their payments on an ARM might change (ie. disclosing the highest monthly amount a borrower might have to pay over the life of a loan). Lenders would also have to notify borrowers 60 days ahead of any change in their monthly payments, compared with the current time frame of 25 days.

The proposal would also keep mortgage brokers from steering customers to lenders with less favorable terms in order to increase brokers’ compensation. It would also prohibit payments to mortgage brokers that are based on the interest rate or other terms of a home loan.

Changes for HELOCs

Lenders would also have to provide a one-page disclosure statement to borrowers that gives basic information and describes some of the risks of HELOCs instead of a more generic disclosure. Also, throughout the life of the loan, consumers would receive periodic statements that show the total interest and fees charged for the statement period and for the year to date.

About the Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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3 Responses to “Federal Reserve Proposes Truth in Lending Changes”

  1. s2kreno Says:

    No one could be “steered” to a loan that cost them more and paid the broker a larger commission if they did a little shopping–if it isn’t illegal for one car dealer to charge more for the same car, it should be the same for lenders or anyone else who sells something. Sometimes things like service count too. People need to stop being such crybabies and expecting the government to do all the work for them. Next thing they’ll want the government to keep Nordstroms from charging more for shoes than Dillards. Ridiculous. The problem is this country has a crummy education and a lazy populace.

  2. fhuff Says:

    You’re right. Borrowers should take the time to shop around and compare loan packages just as they would with other purchases.

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