The Federal Reserve Board is about to decide whether to increase the amount of information in truth-in-lending disclosure forms given to home buyers. But the agency is under heavy pressure from professional lenders to take the easy way out, and it may do just that: nothing.
Under current federal regulations, neither lenders nor home sellers are required to disclose the amount or effect of creative-financing "buydowns" made in connection with a home mortgage.
The lender must give the home buyer a standard truth-in-lending disclosure form. Congress required this to provide consumers with a nationally uniform, dependable guide to evaluate the fees and charges assessed on loans.
The truth-in-lending form carries a statement of the "annual percentage rate" (APR) on the mortgage and the amount of the total "finance charge" borne by the borrower.
But both figures are often far off the mark in home-sale transactions in 1982's tough market. They commonly underestimate the true interest rate the consumer will pay by several percentage points or more. And they minimize the true total financing charges on the loan.
For example, the buyers of a new home may get a federal truth-in-lending disclosure that shows their annual percentage rate will be just over 12 percent. In reality, though, the true annual rate could be above 16 percent, when the financing fees that they are paying are included.
The builder of the house "bought down" (subsidized) the rate on the loan for three years from the market level to 12 percent -- a perfectly acceptable way to attract a buyer. The builder paid the lender, say, $10,000, in cash to compensate for the cut on the loan.
The builder then tacked on that $10,000 to the advertised price of the home prior to sale.
The buyers, however, may well have assumed that they were getting a bargain on the deal. They may have walked away from other subdivisions where the advertised interest rate was higher, but where, in fact, the builder had absorbed the financing subsidy.
The true cost of money to the consumers on the house they turned down, in other words, may have been significantly less than the one they signed up for. The true cost of their purchase over time will be thousands of dollars more than they otherwise would have paid.
But the consumers received no help in assessing these competing costs from the federal law passed to fulfill that very function. That's because under current federal regulations, a home buyer can be left in the dark about who's paid what, when.
The Federal Reserve Board, which administers the truth-in-lending statute, issued those regulations last year. The Fed now concedes that its policies on nondisclosure of home-mortgage financing fees may be "misleading" and "impair buyers' ability" to understand the costs of what they're buying.
To remedy this, the Fed proposed possible changes to its rules this summer and is accepting public comments about them until Sept. 27. The agency has offered several other approaches to tighten up disclosure.
One proposal would require lenders -- who always know the amount of the financing subsidies paid to them -- to include them in the truth-in-lending forms unless the builder or home seller could demonstrate that they weren't being passed on to the consumer.
Another would allow the lender to simply disclose the financing fees paid without showing the annual percentage rate on the loan to the consumer.
Still another approach would require lenders and home sellers to warn buyers that the house price may include financing fees.
Since opening these proposals to "public" comment, the Fed has been deluged with hundreds of letters. But not from the public. Lenders are outraged about the possibility of having to make new disclosures, print forms, retrain staff and open themselves to new legal liabilities.
The Fed has heard virtually nothing from consumers, who generally don't read the Federal Register (where the Fed's request for comments was printed).
If the board continues to hear only from lenders, it may decide to keep home buyers in the dark on the biggest purchase of their lives.
To present comments to the Fed, write to Secretary, Federal Reserve, Washington, D.C. 20551. Refer to Docket No. R-0413).