American home buyers who had hoped to get the benefit of new, nationally standardized "truth-in-lending" disclosure requirements on adjustable-rate mortgages (ARMs) this year shouldn't hold their breaths.
Sources at the Federal Reserve Board -- which proposed a series of toughened requirements for lenders last spring -- now say action is impossible until 1986, despite the pressing need for consumer reforms. The delay in adoption of new disclosure rules for ARMs has been caused by two factors, according to Federal Reserve and congressional experts.
First, the Fed's proposal -- which spells out detailed steps for lenders to follow to make certain that mortgage borrowers understand what they're getting into -- has provoked a torrent of criticism from savings and loan associations, banks, credit unions and other lending-industry members. The Fed received nearly 500 letters on its proposal, the vast bulk of them highly critical, and almost all of them from lenders.
Only a handful of comments came from consumers, since they rarely review the thick, fine-print daily Federal Register publication where the proposed ARM guidelines were aired for comment.
The second delaying factor has to do with federal bureaucratic policy. Since the Fed's proposals would affect lending institutions regulated by several federal agencies, the ARMs issue has been handed to the Federal Financial Institutions Examination Council. Made up of representatives of the Federal Home Loan Bank Board, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Comptroller of the Currency and the Fed, the consensus-seeking council won't make final decisions on new federal-consumer protection until November at the earliest, according to staff members.
Even then, whatever new requirements are adopted, if any, won't become fully effective until Oct. 1, 1986, at the earliest.
What's the ARMs truth-in-lending flap all about? And what did the Federal Reserve want to do that's become so controversial?
The federal flap over ARMs consumer protections is the product of the often-confusing welter of adjustable-rate mortgages available. After studying the vast variety of rate structures, indexes, margins, "teaser" come-ons, rate "caps" and other ARMs features offered by lenders nationwide, the Federal Reserve Board last spring announced that it had become "concerned" that consumers were not being adequately protected under the truth-in-lending statute, which the board administers.
"Unexpected payment changes," unlimited rate increases and confusing indexing-of-rate changes all raise "questions about the ability of consumers to understand and make informed decisions about ARMs before entering into these transactions," the board declared.
Existing Federal Reserve truth-in-lending rules -- which require only generalized disclosures regarding future interest-payment scenarios and their attendant risks -- "may not be fully responding to the needs of either consumers or the mortgage industry," the Fed said.
To remedy this situation, the board proposed several changes affecting lenders nationwide in all transactions involving adjustable-rate loans secured by borrowers' primary residences, excluding floating line-of-credit, "home-equity" mortgages. The new regulatory provisions would include:
*A detailed list of mandatory disclosures that lenders would have to provide borrowers within three business days after the lender's receipt of a mortage-loan application. The rule would insist on "precise" identification of the index to which the loan's rate is tied; a description of how future rate or payment adjustments would be computed throughout the life of the loan; and descriptions of any "teaser" or first-year discounts plus any potential for negative amortization (building up loan principal rather than paying it off) through interest deferrals.
*Mandatory provision of a consumer-education guide developed by the Fed and the bank board explaining the pluses and minuses of alternative ARM packages.
*Disclosure of a "worst-case" scenario for the loan that is based on the mortgage's actual bundle of characteristics.
Under current truth-in-lending guidelines, lenders can provide would-be borrowers with a brief sample rate scenario that may bear little resemblance to what would occur under the terms of a particular adjustable-rate mortgage. That situation -- which spokesmen for the Consumers Union say often leads to abysmal ignorance by borrowers of what they've signed up for -- would end under the Fed's proposal.
When and whether the Federal Reserve's reforms ever will see the light of day in this city of glacial bureaucracies is another matter -- one that's currently on a very slow track.