The Federal Reserve Board has proposed making real estate agents responsible for truth-in-leading disclosures when they are involved in seller financing of home sales, a proposal that has prompted a flood of alarmed opposition from the real estate industry.
The Fed recommendation, which was to become effective in April 1982 but which Congress has postponed until October, has the backing of consumer groups and financial institutions. It was developed because of the rapid rise of home sales being financed in whole or in part by sellers, in which no institutional lender subject to truth-in-lending requirements is involved, leaving consumers on their own.
The Fed estimates that 50 percent of all home sales nationwide now involve some form of seller financing and that in the Washington area the figure may be as high as 90 percent.
Disclosures required under truth-in-lending regulations include the annual percentage rate, total interest payment over the term of the mortgage, the amount financed, total payments of interest and principal, the total sale price, and the payment schedule.
Under the proposed changes, real estate agents who negotiate seller financing when lenders are not involved would have to make these disclosures if they arranged at least five such transactions a year. The Fed said most of these involve a simple interest rate and a balloon payment after a few years and that, unless disclosures are required, it is unlikely that either the total amount of finance charge or the amount of the balloon payment would be explicitly stated in the contract.
Supporters of the inclusion of real estate brokers under the truth-in-lending requirements include, for differing reasons, the banking and savings and loan industries and various consumer-advocate groups.
The financial institutions basically take a "misery-loves-company" attitude, stating that they don't much like the paperwork burden that mortgage disclosure imposes but that, if they have to, anyone doing the same kind of thing should have to, also.
Consumer groups say a broad application of the law is needed to protect consumers from their own lack of expertise in increasingly complicated transactions and from potential abuses by unscrupulous brokers and investors.
But real estate professionals argue that they do not have the necessary training or legal background to fulfill the obligation and that it would cost them--and ultimately the consumer--substantial amounts to comply. In addition, they say the consumers would not receive substantially more protection than they have now, but that real estate brokers and agents would become liable to more litigation even when they do their best to comply.
Moreover, brokers and agents contend, the regulation is a new burden that could threaten the life of their profession at a time of severe depression for the housing industries as a whole.
The Fed knew when it made the proposal that it would generate controversy. In an office memorandum listing the pros and cons of inclusion, Susan Werthan of the Fed's division of consumer and community affairs concluded: "This issue is a difficult one on which emotions may run high on both sides--perhaps out of proportion to the real benefit of coverage or the real burdens of compliance. Strong policy arguments can be made on either side of the issue."
While deciding that on balance the potential benefits to consumers outweighed the adverse impacts, the division nevertheless acknowledged that it was not sure of the effectiveness of the proposal in dealing with the perceived problems:
". . . There is no indication that imposing truth-in-lending disclosures can or will alleviate the purchaser's risks in seller-financed transactions--risks that may be caused primarily by the current economic environment," the memo states.
It also recognized the costs and burdens to an industry that already is beset by serious problems.
After the Fed proposed the new rule in October, the National Association of Realtors put out an alert to its nearly 700,000 members urging them to write in opposition.
The Fed's comment file now contains nearly 3,000 letters--one of the heavier responses to a regulation, a Fed source said--with the vast majority from angry and upset real estate agents and brokers. About 2,000 are form letters of one kind or another, according to the Fed's Freedom of Information Office, but the rest are from individuals who took the time to compose their own comments.
The NAR outlined the major objections in a studied response, citing the expense and saying that more than two disclosures for each transaction most likely would have to be made by various participants.
Individual letters tended to be blunter. "Is the purpose to totally destroy the real estate profession by one more . . . impossible burden?" demanded Betty Pearson, broker/manager at Robert Combs Realtors in Dahlgren, Va.
Wayne Lancaster, then president of the Northern Virginia Board of Realtors, wrote that the truth-in-lending regulations had become the No. 1 topic of discussion of real estate professionals in his area, surpassing talk about mortgage interest rates, federal attempts to end assumptions of low-interest loans and the restructuring of financial institutions.
"It seems to us that, in its zeal for control, the federal government is attempting to extend its hand down to the individual lender the seller and to concurrently make a target for litigation out of the real estate brokers involved in transactions that are partly seller financed," Lancaster said.
Several real estate agents and brokers said the requirements would mean the death of their businesses.
But consumer groups said buyers need the protections of disclosure, and that with seller financing the real estate broker is the only professional involved and so should bear the responsibility.
"Without truth-in-lending disclosures, consumers may not understand that they will soon have to secure another loan possibly at a much higher interest rate, for almost as much as they originally borrowed," Ellen Broadman, government affairs counsel for Consumers Union, said. "If they cannot secure affordable financing, they will be forced to sell their home under duress. The disclosures will alert consumers to this problem."
The Fed staff now is reviewing the comments and could revise the proposals before they are presented for another vote by the board of governors, a Fed spokesman said.