Borrowers who are thinking about taking out an adjustable-rate mortgage (ARM) can look forward to getting a little more information before they agree to the loan, thanks to some new federal regulations.
Some consumer groups, however, say the new requirements still don’t give borrowers enough information to get the best ARM at the best interest rate and terms.
New rules that took effect Oct. 1 require nearly all ARM lenders to give potential borrowers a plainly worded booklet that explains how adjustable loans work and details the risks of having a mortgage that has no set interest rate.
In addition, borrowers must also be given a “historical example” of how payments on a $10,000 loan made under the same terms would have varied over the past several years, so they’ll have a better idea of how their own loan may perform in the long-run.
Borrowers must also be told how their interest rate and payments will be calculated and what kind of “caps” will be used to limit future increases. They’ll get what some lenders call a “worst-case work sheet"--a statement disclosing exactly how high their payment would go if interest rates soar through the roof.
Importantly, all this information will have to be provided before the consumer pays any non-refundable fees. In the past, borrowers who backed out of a deal after finding out exactly what the loan entailed were sometimes stuck paying hundreds of dollars for an appraisal, credit report and other items.
Consumer groups that have been pressing for greater disclosure say the new regulations will be particularly useful because they’ll help take some of the mystery out of adjustable-rate mortages.
‘Room for Improvement’
But some of these consumer groups also say the requirements fall short of giving borrowers all the information they need to shop for the best mortgage deal.
“This is definitely a step in the right direction, but there’s still room for improvement,” said Michelle Meier of Consumers Union, the watchdog group that publishes Consumer Reports magazine.
In particular, Meier said, the new regulations don’t require lenders to disclose the actual “margin” they’ll slap on the loan’s index rate in order to make a profit. If the index rate is 9% and the margin is 2.5 points, the rate a borrower pays will be 11.5%.
Although the new requirements say the lender must disclose a margin, it can be any figure that the lender has used in the last six months, Meier said. “If the lender was using a 3-point margin five months ago and now it’s using a 4-point margin, its disclosure can still cite the 3-point margin even though you’ll be paying more.”
A borrower could determine what size margin the lender would charge by asking the loan officer, Meier said. “But what the loan officer tells you won’t be binding unless you have it in writing. Even then, it won’t do you any good if the lender decides to raise its margin tomorrow.”
To protect themselves, Meier said, ARM borrowers should ask for a written disclosure of the actual margin that will be charged and then ask for a firm, written committment that the figure won’t be changed.
Meier sees another shortcoming of the new regulations: They still allow lenders to change the terms of a loan between the time the borrower gets the disclosure statement and the time the money is actually advanced.
Although a reputable lender wouldn’t purposely lure a borrower with promises of good terms and then hike the rate before the loan was funded, there’s always a chance that interest rates may suddenly surge while the loan is being processed.
When that happens, a borrower usually has just two alternatives: Either accept the higher rate or other unfavorable terms, or cancel the deal and lose hundreds of dollars in fees.
“To protect yourself, ask the lender to give you a written committment that ‘locks in’ all the terms of the loan when you start all the paper work,” said Meier. “That way, you won’t be affected if rates jump, or if the lender changes its policies while your application is still being processed.”
All in all, said Meier, the new ARM regulations “are a net gain for consumers. But you still have to read all the fine print in those loan documents.”