New forms clearly spell out loan risks

washington -- Federal bank regulators on Tuesday published a new set of forms designed to give borrowers a better understanding of mortgages that can adjust to dramatically higher monthly payments.

With mortgage defaults rising among U.S. borrowers, consumer advocates say many lenders encouraged consumers to focus on the initial low-rate “teaser” period without fully informing them that their loan payments could jump.

The disclosure forms published by the Federal Reserve and the other four federal agencies that regulate banks, thrifts and credit unions are intended to give consumers clear information about the risks of adjustable-rate home loans.

One sample form gives borrowers an explanation of features common to adjustable-rate mortgages. Another form compares payments under a traditional fixed-rate mortgage with those under an adjustable-rate one.

Kirsten Keefe, founding director of Americans for Fairness in Lending, an umbrella group of consumer organizations, said the disclosures were an improvement over current ones but were no substitute for a federal law that would ban specific unfair lending practices.

Many consumers, she said, are faced with a stack of confusing disclosures when they obtain a loan and rely on advice from real estate agents and mortgage brokers.

“What’s really needed are laws and regulations that get rid of abusive terms in adjustable-rate mortgages,” Keefe said.

In addition to the Fed, the agencies that developed the new forms are the Federal Deposit Insurance Corp., the National Credit Union Administration and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision. Comments on the proposal are due Oct. 15.

Those banking regulators in July also completed guidelines that call on lenders to strictly evaluate borrowers’ ability to repay home loans.

Mortgage lenders such as Calabasas-based Countrywide Financial Corp. and Washington Mutual Inc. in Seattle package many of their home loans into securities and sell them to investors, but the market for those investments has dried up because of rising defaults and a slumping housing market.

Lenders are not required to use the new forms. However, banking institutions generally follow the regulators’ guidelines, which apply only to federally supervised institutions, not state-regulated ones.

If they do not use the banking regulators’ forms, lenders would have to ensure that their own disclosures and marketing materials provide “clear and balanced” information, federal regulators said.