When you buy a new kitchen stove or a TV on credit, you get a truth-in-lending statement. It's federal law.
When you buy a car on credit, you get a truth-in-lending disclosure. That's federal law.
But when you sign up for the biggest purchase of your life--a home--the odds are rising that you won't see any truth-in-lending statement whatsoever.
If you buy a house with seller-assisted financing, as do the majority of home buyers across the country today, you've got less consumer protection under federal law than when you purchase that stove or TV.
Your "creative" home-loan package may contain all sorts of confusing and risky elements: lump-sum balloon payments, "buy down" subsidies that evaporate within months, ill-defined fees up front that raise the "annual percentage rate" appreciably, and other financing exotica.
But unlike your credit purchase of a kitchen appliance, no one involved in your home purchase is required by law to provide you even minimal truth-in-lending disclosures. Not the seller, not the real-estate broker, not the settlement lawyer, or escrow agent.
That situation won't be changed soon, either. It had been on the verge of correction, but the Federal Reserve Board--the agency that administers the federal truth-in-lending statute--backed off. The Fed last week decided to yank a regulation it proposed in October, and threw the housing-financing disclosure problem up to Capitol Hill. It could sit there indefinitely.
Federal Reserve Board Governor Charles Partee acknowledged that large numbers of home buyers and sellers are locking themselves into financial arrangements that are not fully explained. The real "sleeper" issues, said Partee, are the two- and three-year lump-sum final "balloon" payment requirements written into a high percentage of seller-assisted first- and second-mortgage packages.
When those balloons come due, he predicts, buyers who never fully understood their risk are going to be up a creek. They won't be able to afford to get conventional (18 percent) financing to replace their seller-assisted 11 and 12 percent short-term loans.
The Fed's regulation would have required real estate brokers who help arrange more than five seller-financed transactions a year to provide a one-page, standard truth-in-lending disclosure to buyers.
The form would contain the barest facts about the loan the home buyer was getting: the dollar amount of the borrowing; the annual percentage rate with all fees factored in; the total financing charges to be incurred over the course of the loan; the total number of payments involved; and the amount of the final payment.
The form was the same that banks and savings and loans provide routinely when they make conventional mortgage loans to home buyers. No complex mathematical skills were called for, no computer runs of payment schedules.
The industry outcry against the proposal, however, was deafening. It shook the Fed. Nearly 3,000 real-estate brokers across the country sent letters of protest to the agency, complaining that imposition of the disclosure requirements would be an impossible burden.
They protested the fact that, like everyone else covered by the truth-in-lending law, they'd be subject to civil penalties for filling out the form incorrectly. They fumed about the Fed's proposed requirement that consumers receive the truth-in-lending disclosure before they sign the sales contract committing them to the home purchase.
And they hinted darkly that the Fed's new plan would be the economic coup de grace for the residential resale brokerage business. Sales volume would plummet, agents would have to be laid off, and the real estate recession would turn into a depression.
All this because of a one-page truth in lending disclosure.
The Federal Reserve governors, in their sole concession to consumers, agreed to reconsider the issue in 1983 if Congress does nothing about the problem this year. Meanwhile, though, an estimated two-thirds of all resale transactions nationwide this year will go untouched by truth-in-lending protections.
"I think we'll have thousands of court cases if conditions don't change rapidly," Partee predicts.
No doubt about it. And there's no doubt that future litigation--beyond the inevitable first wave of cases--could be avoided if Congress or the Fed bit the political bullet and clearly assigned responsibility for truth-in-lending disclosure in seller-financing transactions.
If the real estate broker isn't the right party, then how about the seller (or the seller's attorney)? After all, the sellers are the true lenders in these financing deals, and shouldn't escape minimal public oversight simply because they're not professionals. To the contrary, there should be greater oversight for that very reason. illustration: A clean desk (By William T. Coulter)