New Rules Would Require Clearer Disclosure of Mortgage Terms

New rules designed to provide consumers with a clearer understanding of the potential costs and risks of a particular type of loan when applying for a mortgage or home equity line of credit (HELOC) have been proposed by the Federal Reserve Board of Governors.

The proposed rules would modify Truth in Lending Act regulations to make it easier for consumers to identify and understand key terms of a mortgage or HELOC, by ensuring that the most essential information regarding the loan is provided in a clear and conspicuous manner.

"Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply," said Elizabeth Duke, one of the board's five current governors. "With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization."

In addition to new disclosure requirements, the Fed's proposed rules would also prohibit mortgage brokers and loan officers from "steering" consumers into more expensive or riskier loans to increase their own compensation, and would ban linking their compensation to the interest rate or other terms of a loan.

Other proposed requirements would:

• Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers; • Require lenders to show how the consumer's APR compares to the average rate offered to borrowers with excellent credit; • Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and • Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.

On home equity lines of credit, the new rules would require that consumers receive a disclosure reflecting the specific terms of their credit plan at closing. Current regulations only require that consumers receive a lengthy, generic disclosure when they apply for a HELOC. The new rules would also provide new consumer protections related to account suspensions and credit-limit reductions.

"Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances," said Federal Reserve Chairman Ben. Bernanke. "It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset."

The proposed rules are due to be published shortly in the Federal Register, which will mark the opening of a 120-day period of public comment, which must take place before the rules can take effect.