The Federal Reserve today announced a slew of changes and proposed changes to mortgage loan disclosures provided to consumers under the Truth in Lending Act, even as plans to create a new, simplified mortgage loan disclosure form move forward.
The Fed’s interim rule rule revising disclosure requirements under Regulation Z of the Truth in Lending Act applies to loan applications received on or after Jan. 30.
The interim rule requires that loan disclosures include a payment summary table stating the initial interest rate together with the corresponding monthly payment.
For adjustable-rate mortgage (ARM) or step-rate loans, the table must show the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan.
Beginning Jan. 1, the Fed said in a separate announcement, borrowers must also be notified when their loan is sold or transferred.
The Fed is also proposing changes to disclosures consumers receive for reverse mortgages, and that borrowers receive new disclosures when they enter into a loan modification. The Fed will accept comments for 90 days on those proposed changes.
The Fed also put out for 30-day comment a proposed rule implementing new escrow account requirements for higher-priced "jumbo" mortgages, as called for in HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In addition, the Fed announced a final rule implementing a previously announced ban on the payment of yield spread premiums to mortgage brokers and other loan originators in exchange for placing borrowers in loans with higher interest rates than they might have otherwise qualified for.
That rule, which takes effect April 1, allows loan originators to continue receiving compensation that is based on a percentage of the loan amount, but prohibits loan originators who receive compensation directly from the consumer from also receiving compensation from the lender or another party.
Loan disclosures will get another major overhaul in coming months as HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, calls for the Consumer Financial Protection Bureau to draw up a new unified federal mortgage disclosure form.
Consumers currently get two federal mortgage disclosures: one addressing TILA requirements and the other satisfying requirements of the Real Estate Settlement Procedures Act, or RESPA.
The Fed has maintained that TILA disclosures are focused on helping consumers see the true cost of mortgage offers by comparing loan terms, such as the annual percentage rate (APR) including lender fees.
The Department of Housing and Urban Development rolled out new RESPA loan disclosure forms this year, which it said would help consumers understand the trade-off between the cost of settlement services and interest rates when choosing a loan package.
Lenders and the real estate industry have complained that having two sets of disclosures is confusing. The Dodd-Frank bill attempts to address the problem by mandating the creation of a single federal mortgage disclosure form that satisfies both TILA and RESPA requirements.
Treasury Secretary Tim Geithner, speaking this month at New York University’s Stern School of Business, said the Treasury Department wants to move quickly to give consumers simpler disclosures for credit cards, auto loans and mortgages.
Next month, the department will convene mortgage companies, consumer advocates, housing counselors and other experts to gather ideas on how to combine the "two separate and inconsistent federal mortgage disclosure forms that consumers currently get," he said.
"We’ll take the best ones, test them on consumers, and then soon be able to unveil a new, easy-to-understand, federal disclosure form," Geithner promised.
Inman News columnist Jack Guttentag, also known as "The Mortgage Professor," has called the existing system "a disgrace," with borrowers inundated by "garbage disclosures" and critical information buried or absent altogether.
Guttentag is not optimistic that the Dodd-Frank bill will solve the problem, because it appears to have more mandated disclosures than TILA, some of which are "nonsensical and will prejudice the ability of (the Consumer Financial Protection Bureau) to do its job," Guttentag wrote in a recent column.