The Federal Reserve Bank (the Fed) is sticking to its word to enforce consumer protection requirements now that the Dodd-Frank amendments to the Truth in Lending Act (TILA) have gone in to effect.
As of January 30, 2011, TILA will reflect changes proposed by the Fed requiring even greater lender transparency, especially when it comes to the much-maligned adjustable rate mortgage (ARM). Lenders making ARMs and other variable rate loans to homebuyers will be required to provide disclosures that clearly detail the specific time and circumstances that will change the interest rate or payment schedule of a loan. [For more TILA updates, see the first tuesday Legislative Watch for October 2010, November 2010 and December 2010.]
In an attempt to force lenders to provide easily understandable disclosure documents to consumers, the Fed is also requiring disclosures be made in plain language, laid out in a spreadsheet or chart format that clearly illustrates the risks of variable terms associated with the loan.
Under the guidelines, lenders must disclose that borrowers are not guaranteed the ability to refinance to a lower rate after their loan adjusts. Additionally, lenders will be required to plainly state the maximum interest rate possible on the loan — a kind of “worst case” rate previously buried deep in the jargon of prior loan documents.
first tuesday take: These avuncular regulations are among the most user-friendly and socially effective to be rolled-out under the recent amendments to TILA. Previously, public policy demanded the government refrain from this brand of hand-holding consumer protection. With the revisions to TILA created under Dodd-Frank, the Fed is taking the approach of a caring uncle, gently nudging borrowers in the direction of the most beneficial and least risky loan arrangements. This approach has the dual purpose of protecting the individual consumer as well as stabilizing real estate sales volume and prices from year to year.
Under Dodd-Frank, the Fed now regulates residential mortgage loan practices to stop abusive, unfair, deceptive and predatory terms which are not in the best interest of the homebuyer. The Fed has proposed many new residential mortgage loan disclosure requirements to protect the best interest of the homebuyer with regulations that go well beyond mere full disclosure and transparency. Thus, those patient and intelligent borrowers can decipher loan arrangements to make the most informed decision possible while all homebuyers are guided by the invisible hand of the Fed. [15 U.S. Code 1602 §129B]
While the Fed has made its best effort to guide borrowers through a mortgage loan process structured to protect them by default, bankers and fresh water politicians scream the Fed has created a nanny state in which the government is choosing the best loan for the consumer. In reality, ARMs are inherently predatory and have been since the Treasury began allowing banks to originate them in 1982. Homebuyers must be informed of the risks many lenders induce them to take — lest we experience another real estate market meltdown.
Although the Fed cannot revoke a lender’s right to adjust mortgage rates for borrowers under a variable rate loan arrangement, the now-premiere regulatory force in the mortgage loan market can guide borrowers through the process with the gentility of a kind, old uncle and the authority of a federal regulator. [For more information on the effect of ARMs on the California real estate market, see the December 2010 first tuesday article, The iron grip of ARMs on California real estate.]
Re: “More Transparency for Variable-Rate Loans” from the New York Times
Having the government more involved is just going to make more of a mess in our industry rather than clean things up. ARM’s have their place in our business and it’s up to the borrower to make sure that they understand what they are signing their lives away to. Let us do are job and educate our buyers on what to look out for, not the government. We at Keller Williams educate our buyers to more risky lending choices, but ARM’s are not predatory by nature. They are just another option for the right borrower.
You state “In reality, ARMs are inherently predatory and have been since the Treasury began allowing banks to originate them in 1982.”
That is patently ridiculous. As your Chairman knows, ARMs were devised during a period of escalating interest rates and lenders, portfolio lenders in particular, were understandably reluctant to commit funds for 30 years at an interest rate that might well render the market value of the underlying note to be far less than the face value.
ARMs can often be the best choice for a borrower when fixed rate loan interest rates are at a high point of the rate cycle. . The borrower has to make a decision (educated guess) as to which product will average the lowest interest rate over the long run.
I have had many ARM loans since 1982, and, in general, they have been far more beneficial to me than fixed rate loans would have been. Periods of interest rate reductions have been far more common and sustained than periods of interest rate increases. My biggest problem has been coming up against the ‘floor’ or minimum rate defined in the notes. I have never gotten near a cap rate in all this time.
Lenders should definitely provide clear explanations about the upsides and downsides of ARMs and only buyers who can handle the worst case scenarios should get them, but they are not inherently bad in themselves.
Having a variety of products are needed to fit the various needs of a homeowner. A properly explained ARM is not predatory in any shape or form.
Dale not only will your daughter pay more for her appraisal but all her closing cost as well. If she works with an idependant mortgage agent she will get the best deal. They work very hard for their money these days and must disclose all information. Your local bank can hide that information and it is legal. Talk about a lopsided system. New regulations were about getting rid of the competition for the banks so they can pad their pocketbooks. Once they eliminate the small mortgage broker they can raise prices in the name of profit.
The “Feds” new what they were doing for the last 10 yewars, the steps being taken now are just to save face, they could really care less of what happens to civilian home owners. This I’m sure that we are all aware.
Funny this id the most positively written artical i have read about all the new regs. My Dauther is trying to buy A HOUSE AND THE APPRAISAL THAT WOULD HAVE COST HER 300 BEFORE HVCC NOW COST HER $500. oUR GOVERNMENT IS JUST PLAYING GAMES TRYING TO MAKE US BELIEVE THEY ARE PROTECTING THE CONSUMER BUT MOST OF US IN REAL ESTATE KNOW THE TRUTH ABOUT THE NEW LAWS AND LOPSIDDED ENFORCEMENT.
All ARM Loand need to be eliminated and/or modified to fixed to allow home owners to remain in their homes. Lenders created athis deceptive monster and lenders need to be forced to bite the bullit and be held accountable for these bogus lending practices. Halt all Foreclosures until they are audited one by one.
Why aren’t foreclosed homeowners marching on the steps of the White House together? Too little too late since they have devaluated property values in every community. Stop bailing out the offerders (Lenders) and bail out the home owners with the funny money ARMs.
The problem is not the new, easier to understand forms but the rotten batch that has gotten so many homeowners in trouble. To bad the legislation couldn’t have retroactive to the birthday of the deceptive loans.