Spurred by new state laws and consumer interest, lenders across the country are beginning to translate mortgage loan disclosure forms from murky legalese into plain English.
Six states have passed laws requiring that consumer debt contracts, including home loans, be written in plain language that can be understood by most people without the assistance of an attorney. New York began the trend in 1978; the District and about 20 states, including Maryland, are considering such legislation.
Many lenders in states without the requirements want plain-English forms, says Howard Reyder of Banconsumer Services, consultants in Tonawanda, N.Y. The lenders find it attracts business and helps in late-payment situations, he said.
The need for plain language in home-loan documents is clear, said David Greenberg, legislative director of Consumer Federation of America here, "especially now that we're dealing with adjustable-rate and other complex mortgage forms."
But at the moment, few mortgages being written in this area are in plain English.
Jacqueline Haerbig, manager of the Loyola Federal Savings and Loan Association branch in Kemp Mill, Gary Schiller, residential loan vice president for the National Bank of Washington, and Ursula Williams, settlement specialist with Dominion Federal Savings and Loan Association in Virginia, say that, to encourage sales of home loans to outside investors, most are written on forms developed jointly by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
The two corporations buy home loans in the secondary market to free up money for additional mortgage lending, and thus the forms they require set the standard for most lenders. The FNMA/FHLMC forms for Virginia, the District and Maryland were last revised in 1975 to 1977, before plain language was an important consumer issue.
Schiller, whose bank was the area's first major lender to draft comsumer installment loans in plain language, points out that home-loan business is slow now, reducing the urgency of revising forms. He contends, however, that many mortgage terms continue to confuse consumers, even on traditional, fixed-rate loans.
Haerbig says Loyola's loan disclosure form for use at settlement, required by the Truth-in-Lending Act, is being rewritten in plain language in time for an Oct. 1 deadline for new truth-in-lending forms. She maintains that the S&L's loan application disclosure form, required by the Real Estate Settlement Practices Act, is quite clear to consumers.
As states change their rules, Fannie Mae and Freddie Mac are slowly rewriting their loan forms into plainer English. These are done on a state-by-state basis to accommodate differences in the laws, and the emphasis is on forms for the many new kinds of adjustable-rate loans now on the market. Because Fannie Mae and Freddie Mac have different ARM programs, their new forms are issued separately.
The Federal Housing Administration is not yet working on revising forms for loans insured under its programs, a spokesman said, because congress is considering extensive changes in FHA and Veterans Administration loan activities.
What's the difference between traditional and plain language mortgages? For example, look at how traditional FNMA/FHLMC forms Virginia and "plain language" forms from New York, say that the borrower owns the home.
Traditional: "Borrower covenants that borrower is lawfully seised of the estate hereby conveyed and has the right to grant and convey the property, that the property is unencumbered, and that borrower will warrant and defend generally the title to the property against all claims and defenses . . . ."
Plain: "I promise that . . .: (A) I lawfully own the property; (B) I have the right to mortgage, grant and convey the property. I give a general warranty of title to lender. This means that I will be fully responsible for any losses which lender suffers because someone other than myself has some of the rights in the property against any claims of such rights."
But a Fannie Mae negative amortization form proves that simple words can make a complex idea only so clear. It reads:
"This note provides for calculations of two separate monthly payment amounts. One will be the amount that you must actually pay each month. The other will be an amount that you would pay each month to fully repay the loan on the maturity date. This means that you could repay more than you originally borrowed or that you could repay your loan before the maturity date."