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