Fed Moves to Improve Mortgage Disclosure

Shamed from its failure to prevent the housing bubble and wary of being stripped of its regulatory powers by the still gestating Consumer Financial Protections Agency, the Federal Reserve is stepping into high gear. Six months ago, the amended Truth in Lending Act (TILA) officially went into effect, and followed this up last month with the implementation of new “Regulation Z” to this act.

For those of you unfamiliar with this enhancement in regulation, the amended TLIA mandated an increase in transparency in the mortgage application process. According to the Fed, this act “requires creditors to give good faith estimates of mortgage loan costs (”early disclosures”) within three business days after receiving a consumer’s application for a mortgage loan and before any fees are collected from the consumer, other than a reasonable fee for obtaining the consumer’s credit history.” Previously, these disclosure rules only applied to primary residences; now they apply to “all dwellings.”

According to the Fed, “Uniformity in creditors’ disclosures is intended to assist consumers in comparison shopping” and prevent them from feeling pressured to close a deal right away. Towards this end, borrowers MUST wait at least 7 days after receiving the initial good-faith estimate before they can close on the loan. During this period, they can thoroughly evaluate the lender’s offer and even consult with other lenders. Additionally, if the final APR rate is off by more than .125% from the good-faith estimate, then borrowers MUST wait another three days before closing.

If the original act was designed to increase transparency during the application process, then the new Regulation Z (which goes into effect immediately, but which lenders technically have 60 days to implement) should increase transparency after the mortgage has already been completed. Specifically, if the loan is sold or transferred to a new lender/investor/institution, then the acquiring entity has 30 days in which to inform the borrower of the change.

This regulation, while seemingly trivial, should address the massive uncertainty that has arisen over the last decade, as mortgages change hands at an increasingly rapid speed. Only recently, with the CDO fiasco, has the complex chain of mortgage lending that stems from origination to “packaging” to investing come to light. For the most part, borrowers are blissfully ignorant to this process; all they care about is to whom they should mail the monthly mortgage payment to. Only recently has this become a problem, as delinquent borrowers have sought loan modifications, but must first track down the current owner and obtain his permission before such is possible. As a result of the new rule, fortunately, the current owner’s identity will no longer be a mystery requiring the prowess of a homicide detective to unravel.

Overall, these regulatory changes do essentially nothing to prevent a repeat housing bubble from inflating. Still, that they increase the transparency of the system is laudable in its own way. Borrowers can no longer complain that they weren’t given adequate time to consider a mortgage offer, or that the original good faith estimate differed drastically from the final numbers, or that they don’t know who owns their mortgage. If knowledge is power, than borrowers now have some muscle!