Fed proposes new mortgage lending disclosures

These changes are a result of consumer testing conducted by the Fed in its comprehensive review of the rules for home-secured credit and are intended to provide new consumer protections for all home-secured credit. These changes are offered for public comment

Some of the proposed changes include closed-end mortgage disclosures to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. The Fed's proposal would:

Improve the disclosure of the APR so it captures most fees and settlement costs paid by consumers
Require lenders to show how the consumer's APR compares to the average rate offered to borrowers with excellent credit
Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing
Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages

The Fed believes that disclosures alone may not always be sufficient to protect consumers from unfair practices. Therefore, to prevent mortgage loan originators from steering consumers to more expensive loans, the Fed's proposal would:

Prohibit payments to a mortgage broker or a loan officer that are based on the loan's interest rate or other terms
Prohibit a mortgage broker or loan officer from steering consumers to transactions that are not in their interest in order to increase the mortgage broker's or loan officer's compensation

The rules for home-equity lines of credit would be revised to change the timing, content, and format of the disclosures that creditors provide to consumers at application and throughout the life of such accounts. Currently, consumers receive lengthy, generic disclosures at application. Under the proposal, consumers would receive a new one-page Fed publication summarizing basic information and risks regarding home-equity lines of credit at application.

Other Fed proposals include:

Prohibit creditors from terminating an account for payment-related reasons unless the consumer is more than 30 days late in making a payment
Provide additional protections related to account suspensions and credit-limit reductions, and reinstatement of accounts

The Fed will also work with the Department of Housing and Urban Development (HUD) to make the disclosures mandated by TILA, and HUD's disclosures, required by the Real Estate Settlement Procedures Act, complementary; potentially developing a single disclosure form that creditors could use to satisfy both laws.

In a statement outlining these proposals, Federal Reserve Chairman Ben Bernanke said "Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances."

Federal Reserve Governor Elizabeth Duke added, "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."