Fed Proposes Revamped Disclosure Forms

deral Reserve Board has proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home equity lines of credit (HELOCs). These changes, offered for public comment, reflect the result of consumer testing conducted as part of the board's review of the rules for home-secured credit. ‘Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,’ says 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.’ In formulating the proposed revisions to Regulation Z, the Fed used consumer testing to ensure that the most essential information is provided at a suitable time using content and formats that are clear and conspicuous. ‘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,’ says Elizabeth A. Duke, the board's governor. ‘With this in mind, the disclosures would be revised to highlight potentially risky features, such as adjustable rates, prepayment penalties, and negative amortization.’ Closed-end mortgage disclosures would be revised to highlight potentially risky features, such as adjustable rates, prepayment penalties and negative amortization. The board's proposal would mandate that disclosure of the annual percentage rate (APR) include 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 adjustable-rate mortgage monthly payments might increase. The Fed says its board will also work with the Department of Housing and Urban Development to make the disclosures mandated by TILA, and HUD's disclosures, required by the Real Estate Settlement Procedures Act, complementary. Its goal is to develop a single disclosure form that creditors could use to satisfy both laws. The board's recommendations also address steering practices used in origination. Specifically, the board's proposal would prohibit payments to a mortgage broker or a loan officer that are based on the loan's interest rate or other terms, and prohibit a broker or loan officer from steering consumers to transactions that are not in their interest in order to increase the broker's or loan officer's compensation. The rules for HELOCs would be revised to change the timing, content and format of the disclosures that creditors provide to consumers at application and throughout the life of such accounts, the Fed says. Under the proposal, consumers would receive a new one-page Federal Reserve Board publication summarizing basic information and risks regarding HELOCs at application. Shortly after application, consumers would receive new disclosures that reflect the specific terms of their credit plans. In addition, the board's proposal would prohibit creditors from terminating an account for payment-related reasons,unless the consumer is more than 30 days late in making a payment, and provide additional protections related to account suspensions and credit-limit reductions, and reinstatement of accounts. SOURCE: Federal


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