New Federal Reserve Board regulations requiring lenders to provide earlier and more extensive disclosures about their adjustable-rate mortgages may make it easier for borrowers to shop for loans.
Under the new rules, which took effect Dec. 28 but don't become mandatory until next Oct. 1, lenders must prepare disclosure forms that give information about their adjustable-rate mortgages. The forms must include information about interest rates, frequency of rate and payment adjustments and examples of a worst-case scenario that shows what would happen to payments should the loan rate rise to the maximum permitted level. The disclosures also would have to explain the method lenders use to calculate rate changes and identify the index to which the loan is tied.
Moreover, the regulations require lenders for the first time to provide an example of a $10,000 loan showing how the loan's rate, payments, remaining balance and interest rate would change because of actual interest rate fluctuations over 15 years. Most important, lenders would have to provide the disclosures and a handbook outlining how adjustable-rate mortgages work in general at the time of application but before borrowers pay nonrefundable application fees.
Under the Fed's old disclosure rules, lenders only had to disclose that a loan had a variable rate, reveal limits on rate increases and provide an example showing the effects of rising interest rates on payments for specific loans. Mortgage companies did not have to provide a disclosure until after a borrower applied for a loan and paid an application fee, according to Fed officials. Now, the mortgage companies will have to provide both a general program disclosure at the time of application and a later one that goes into more detail about a borrower's particular mortgage.
The changes come at a time when the use and types of adjustable-rate mortgages have skyrocketed in response to higher interest rates, particularly for fixed-rate loans. Last January, adjustable loans accounted for only 28 percent of all mortgages; by November, the figure had jumped to 63 percent, according to statistics compiled by the Mortgage Bankers Association of America, a trade group representing lenders.
The new rules also cap an effort to eliminate different sets of disclosure requirements used by various federal agencies that made it difficult for borrowers to shop for loans. Although the Fed's requirements are supposed to apply to every lender, other agencies, such as the Federal Home Loan Bank Board, the Office of the Comptroller of the Currency and the Department of Housing and Urban Development, each have their own disclosure requirements for lenders they regulate. Consequently, when borrowers could obtain disclosures before applying for loans, they got different disclosures depending on the lender they went to, which made comparing information difficult.
But now the Federal Reserve Board's new regulations will become the standard for three of the four agencies, which, like the Comptroller of the Currency, either plan to eliminate their own rules in favor of the Fed's or, like the Federal Home Loan Bank Board, plan to draft identical requirements. HUD plans to continue to use its own form. Consequently, the rules will ensure that when borrowers "shop for an ARM, they will get a disclosure form that follows the same format so it will be easy to compare information from different lenders," according to a Federal Reserve Board attorney who requested anonymity.
Because borrowers now will get a disclosure before they pay an application fee, federal officials expect that more will shop and compare mortgage programs. Stephen Johnson, a Federal Home Loan Bank Board attorney, said, "People had to pay a fee to get information but then they were committed to using that lender. They could get major features like rates and adjustment periods, but they couldn't find out about the finer points without applying."
Nonetheless, some lenders doubt that borrowers will take advantage of the new rules to shop for loans. David Hershman, vice president for Wye Mortgage in Bethesda, said "we have disclosures now, but no one comes in to get them ahead of time. If there is loan shopping, it's usually over the phone. Most people won't take the time or the trouble to get the disclosure in writing."