After the Fall: Federal Reserve Board Proposes Sweeping Changes to Mortgage Disclosures

From time to time our government regulators look to improve the disclosure forms that are required to be provided to new mortgage applicants. Yet somehow, they manage to make fairly simple concepts, complicated. The APR (annual percentage rate) is a perfect example. Even loan officers have difficulty explaining how APR actually works... why should the average homebuyer be expected to understand it?

On Thursday, July 23, the Federal Reserve Board proposed changes to Regulation Z (Truth in Lending) once again, to make make further "improvements" to these disclosure forms. The process is to make the recommended changes available for public comment. You can bet that they'll be receiving comments from yours truly.

Ever wonder why it takes a catastrophe before our government decides to take action? Its because there are no political rewards for doing so when times are good. The U.S. Department of Housing and Urban Development (HUD) has proposed changes to the TIL disclosures numerous times; nothing ever stuck. Now, after the "free" market has already gotten rid of the all the sub prime lenders and their "stick it to em" toxic mortgage programs at the center of the sub prime mess, here comes the Fed to step in to play savior. Just try to find an Option ARM, 2/28 or 3/27 loan - the primary "exotic" culprits - today...you won't find one!

Here's an excerpt from Federal Reserve Chairman Ben S. Bernanke's comments: "Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances. 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.

Now here's my comment: ARE YOU FREAKIN KIDDING ME? WHERE WERE YOU WHEN HOUSING VALUES WERE JUMPING UP 10% - 20% ANNUALLY DUE TO THE AVAILABILITY OF THE EXACT TYPES OF LOANS YOU NOW WANT TO "PROTECT" CONSUMERS FROM? HERE YOU COME, AFTER HOUSING PRICES, STOCK PORTFOLIOS AND 401K'S HAVE ALL BUT COLLAPSED... NOW YOU WANT TO "PROTECT" US?

Now here are Governor Elizabeth A. Duke's comments: "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. With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization."

(You may insert the same comment from me above, here.)

Does anyone else see the ridiculousness of these comments? Okay, that's enough ranting. I do want to touch on the basic points of the proposed changes. Here they are:

Improve the disclosure of the annual percentage rate (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; and

Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages

Really. Let's go one by one.

Point 1 - Currently, APR already reflects all lender and broker fees. Let's just jack that APR even higher by including things like title insurance to make APR even less useful than it already is.

Point 2 - let borrowers know that their interest rate is higher because of their below average FICO score... we need a law for this? Right, because a loan officer will leave that little tidbit of information out... give me a break.

Point 3 - Not a bad idea but it's just one more way for a lender have rate lock-ins "accidentally" expire. "Oh, we're sorry, your rate lock expired because you didn't receive the same disclosures we were required to provide you within 3 days of the application and today's rates are higher" Sound familiar?

Point 4 - "Might" increase? Yea, that sounds useful. I'm being facetious, of course.

Now it gets even better.

According to the Board, it "recognizes that disclosures alone may not always be sufficient to protect consumers from unfair practices." So, in their infinite wisdom, in order to prevent loan originators from "steering" consumers to more expensive loans, the Board'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; and

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.

On the first point they offer not a single recommendation of how a loan officer should be paid. I feel sorry for us all if loan officers were all salaried. The most highly trained and experienced loan officers would immediately leave the industry - present company included!

The second point - wow, this really sounds great doesn't it? And just how do they propose to recognize, administer and regulate such a prohibition?

There are also a few "recommendations" for home equity lines:

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.

Point 1 - what "payment-related reasons" are there besides late payments!!!

Point 2 - this is the only point I agree with. Having 2 separate lines of credit capped due to no fault of my own, this is one area that I can relate to. Why should a lender be able to simply change the terms of a loan they agreed to after the loan has been granted?

Once again, our government has failed us and allowed harm to the taxpayers of this country. Consider that trillions of of dollars in equity have been wiped out. Now, they come parading in as white knights coming to our rescue but only after the damage has been done.

Their answer, of course, is that by passing these protectionary actions we will be better protected against the crisis from occurring again. It kind of reminds me of our health care system. We have a "help the sick" system when we would be much netter off with a "maintain health" system. Our government loves to pass new laws rather than simply enforcing the laws already passed.

The truth is, our government was asleep at the wheel during the ramp up to the implosion. And you can be sure, another boom/bust cycle will occur before long. We need to recognize the ridiculousness of these government follies and realize that we must responsible for our actions - we cannot depend on government oversight to protect our interests. Government's primary interest is to stay in power. To "look good" to the American public. Your recognition of this fact may keep you from losing in the next boom and bust cycle.