Washington The Federal Reserve on Thursday approved proposals designed to make it easier for Americans with mortgages, or shopping for them, to better understand how the loans work.
The action comes after lax lending and, in some cases, borrowers who didn’t fully understand the terms of their home loans, ended up buying houses that they couldn’t afford. That contributed to the worst collapse in the housing and mortgage markets in 70 years.
“Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,” said Fed 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.”
Among the changes, mortgage lenders would need to explain potentially risky features of a mortgage in a one-page “plain-English” question-and-answer format before a consumer applies for a loan. Improved disclosure of the annual percentage rate, or APR, to capture most fees and settlement costs the borrower pays also would be required.
For adjustable-rate mortgage customers, lenders would be required to show consumers how their payment might change. Lenders also would have to notify customers 60 days in advance of a change in their monthly payment.
Michael Calhoun, president of the Center for Responsible Lending, a nonprofit group that fights abusive financial practices, said the plan holds “great promise for eliminating abusive and unfair practices that have become commonplace in the mortgage industry.”
John Courson, president of the Mortgage Bankers Association, called the proposals “dramatic,” but said the trade group will work to “ensure that potential borrowers have a crystal clear understanding of their loan without making the process more burdensome than it has to be for either the borrower or the lender.”
The banking industry said it welcomed the efforts but was uncertain whether the Fed’s plan would lead to better-informed borrowers.
To help shape its proposals, the Fed reached out to consumers to get a better grasp of how they gather information on mortgages, disclosures that they find useful and information they think is confusing.
“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 Fed member Elizabeth Duke, the central bank’s point person on the proposals.