More Changes to Disclosures

Those of us actively working in the real estate industry remember last July when the Mortgage Disclosure Improvement Act of 2008 went into effect.  At that time, each Truth in Lending form was revised to contain the verbiage, "You are not required to complete this agreement merely because you have received these disclosures or signed a loan application."  In addition to mandating the sentence, the new law mandated that if the APR increased more than 1/8 of a 1%, a new truth in lending had to be disclosed to the borrower and the borrower had to wait three days to close.

Now, over a year since this revision, the Federal Reserve is changing the form again.  They published their interim rule on August 16, 2010 regarding the new truth in lending form.  The new form is optional for lenders from October 25 through January 30 of 2011, when it will become mandatory for all mortgage lenders.

Amazingly, the Federal Reserve has announced that even though use of the form is optional beginning this past Monday, they are still accepting comments about the new form and may issue further revisions to it before January 30, 2011. 

The most basic change is that the new truth in lending must disclose a payment summary for all mortgage loans, whether fixed or adjustable.  The payment summary must include the initial interest rate of the loan, and if it is an adjustable rate mortgage, the maximum interest rate and payment that can occur for five years and the maximum interest rate and payment possible over the life of the loan.  The truth in lending must also contain a statement that there is no guarantee that the consumer will be able to secure a lower rate by refinancing the loan.  Even though the Mortgage Disclosure Improvement Act of 2008 calls for this statement only on adjustable rate loans, the new Federal Reserve rule requires that the statement be on all Truth in Lending forms for all loans.

The new form will require several new tables.  For instance, on adjustable rate loans, at each scheduled rate adjustment, the form must display the payment corresponding to the increase and the earliest date at which the increase could occur.    Loans that are escrowed for taxes and insurance must display the full payment with the taxes and insurance on the truth in lending.  (Presently the truth in lending form displays only the principal and interest and the mortgage insurance if applicable.)  The irony is that the full payment with the taxes and insurance used to appear on the good faith estimate form, but when HUD introduced the new revised form this year, they took the escrowed payment off the form which has created a lot of confusion.  If the loan has mortgage insurance on it, the truth in lending form must display the mortgage insurance  and the date of automatic termination.

Introductory and "teaser" interest rates must be clearly defined as such with a clause that says "You have a discounted introductory rate of _____% that ends after (period).  In the (period), even if market rates do not change, this rate will increase to________%)."

I do not disagree with all of this.  A lot of consumers simply do not understand the difference between an introductory rate and a permanent rate, just as there were consumers walking around a few years ago who believed that they had a "fixed" rate when in fact the rate was fixed for only a set period of time, say five or seven years, and after that they were going to experience a rate increase.  So disclosure, especially where adjustable rate mortgages are concerned, is very important.

I do not even disagree with the statement to the consumer that there is no assurance that they can refinance their loan in the future.  Those are just the facts.  Many people across the U.S. would have loved to have refinanced their homes over the last two years but were unable to for a variety of reasons.

What I do disagree with is taking the time to make our industry revise all of these forms yet again when the new Consumer Financial Protection Bureau is actively working on getting rid of both the truth in lending and the good faith estimate and combining both forms into one new disclosure.  In fact, the Dodd Frank Bill actually mandates that a new form be created.  Every time that we have to change or revise disclosures or change the processes, it costs the entire industry money, from the very smallest shop like mine who has to invest in new software, to the mortgage giants who have to invest in new software.  If the changes make sense and they can be expected to be permanent--or as permanent as anything in our world is--then the cost is worth it.  But if what we are spending money on will be obsolete as soon as we have invested in it, then it is a wasted expense which is going to be passed on to the consumer in the form of higher fees.

Why don't we just all wait until Elizabeth Warren and company get one new form ready and then we can all spend of all our money switching over to that system?