The Fed flexes its ARM muscles
The Federal Reserve Bank (the Fed) is sticking to its word to enforce consumer
protection requirements now that the Dodd-Frank amendments to the Truth in Lending Act (TILA) have gone in to
effect.
As of January 30, 2011, TILA will reflect changes proposed by the Fed requiring even greater lender
transparency, especially when it comes to the much-maligned adjustable rate mortgage (ARM). Lenders making ARMs and
other variable rate loans to homebuyers will be required to provide disclosures that clearly detail the specific
time and circumstances that will change the interest rate or payment schedule of a loan.
In an attempt to force lenders to provide easily understandable disclosure documents to consumers, the Fed is
also requiring disclosures be made in plain language, laid out in a spreadsheet or chart format that clearly
illustrates the risks of variable terms associated with the loan.
Under the guidelines, lenders must disclose that borrowers are not guaranteed the ability to refinance to a
lower rate after their loan adjusts. Additionally, lenders will be required to plainly state the maximum interest
rate possible on the loan — a kind of “worst case” rate previously buried deep in the jargon of prior loan
documents.
Clarion's take: These avuncular regulations are among the most user-friendly and socially
effective to be rolled-out under the recent amendments to TILA. Previously, public policy demanded the government
refrain from this brand of hand-holding consumer protection. With the revisions to TILA created under Dodd-Frank,
the Fed is taking the approach of a caring uncle, gently nudging borrowers in the direction of the most beneficial
and least risky loan arrangements. This approach has the dual purpose of protecting the individual consumer as well
as stabilizing real estate sales volume and prices from year to year.
Under Dodd-Frank, the Fed now regulates residential mortgage loan practices to stop abusive, unfair, deceptive
and predatory terms which are not in the best interest of the homebuyer. The Fed has proposed many new residential
mortgage loan disclosure requirements to protect the best interest of the homebuyer with regulations that go well
beyond mere full disclosure and transparency. Thus, those patient and intelligent borrowers can decipher loan
arrangements to make the most informed decision possible while all homebuyers are guided by the invisible hand of
the Fed. [15 U.S. Code 1602 §129B]
While the Fed has made its best effort to guide borrowers through a mortgage loan process structured to protect
them by default, bankers and fresh water politicians scream the Fed has created a nanny state in which the
government is choosing the best loan for the consumer. In reality, ARMs are inherently predatory and have been
since the Treasury began allowing banks to originate them in 1982. Homebuyers must be informed of the risks many
lenders induce them to take — lest we experience another real estate market meltdown.
Although the Fed cannot revoke a lender’s right to adjust mortgage rates for borrowers under a variable rate
loan arrangement, the now-premiere regulatory force in the mortgage loan market can guide borrowers through the
process with the gentility of a kind, old uncle and the authority of a federal regulator.
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