Your Mortgage : Bill Protects Borrowers From Rate Gouging

Mortgage borrowers are about to get an important new set of federal consumer protections designed to prevent them from stumbling--or being pulled--into double-digit interest rates and crushing fees at closing.

High on the list of borrowers slated for new protections: Seniors who sign up for reverse mortgages that can sometimes saddle them with effective annual rates of 20% to 30% or more.

Tucked away in a massive interstate banking bill approved by House and Senate conferees is a section on “high-cost mortgages”--including everything from home-improvement loans to consumer-financing plans for families with subpar credit reports but plenty of real estate equity.

The new legislation is the product of Capitol Hill hearings that documented rate-gouging by unscrupulous lenders and mortgage brokers who target and prey on vulnerable homeowners, especially elderly persons and financially unsophisticated borrowers.

As one example of such scams, a 72-year-old woman described to a Senate committee how she was lured into a $150,000 home-improvement mortgage by a door-to-door con artist. When she went to closing, the fees charged by the lender came to more than $23,000. Worse yet, the principal and interest payment due every month was larger than her entire gross monthly income. But she had signed up for those very terms, and faced foreclosure if she failed to pay on time.

The new bill will make it harder for loan brokers to trap unwary borrowers by outlawing certain types of mortgage programs outright, and by beefing up truth-in-lending disclosure requirements for many others.

Here’s a quick overview of some of the new protections, and what they may mean for you or a homeowner you know:

One of the most far-reaching impacts will be on the burgeoning reverse mortgage market for seniors. The bill carves out a whole new chunk of the Truth-in-Lending Act for reverse mortgage loans and lines of credit.

Reverse mortgages function as the name suggests: Rather than the homeowner sending the lender a check, the lender sends money to the homeowner. The checks may be monthly or demand-activated, as in lines of credit programs. Whatever the payment method, the senior’s home equity serves as the collateral for the loan.

In some cases, the lender’s compensation includes not only a base interest rate but an equity share or participation in the appreciated resale value of the house itself. If a homeowner dies or sells the home in the first one or two years under certain equity-participation reverse mortgage plans, the annualized effective interest cost to the borrower can hit 20%, 30%, 40% or even more.

Under the new federal rules, all reverse mortgage loan applicants will have to receive specialized truth-in-lending disclosures that spell out these risks under a range of economic scenarios. The disclosures will have to be delivered no later than three days prior to closing and will allow applicants to bail out of the transaction.

Mandated in the new disclosure form: A “projected total cost” forecast, including equity participation as well as the costs of financial annuities that are integral to certain reverse mortgage programs.

High-rate home-equity loans for consumer credit purposes are another major focus of the bill. It defines “high cost” as any mortgage carrying an annual percentage rate 10 points higher than the Treasury security rate for comparable maturity periods. If 10-year Treasuries are at 5 1/2%, for example, a 15 1/2% mortgage with a 10-year term would fit the definition of high cost. So too will loans that carry points and fees payable by the borrower that exceed 8% of the total loan amount. On a $50,000 loan, that would mean combined brokerage, origination and other fees of $4,000--not at all unusual for borrowers with prior credit problems.

On all such high-cost mortgages, new disclosures will be required emphasizing the effective annual percentage rate the borrower is signing up for, plus a last-minute way out:

“You are not required to complete this agreement,” reads a form that all affected borrowers will now receive, “merely because you have received the disclosures or have signed a loan application.”

Beyond tougher truth-in-lending disclosures, the bill also bans balloon payments (lump-sum payoffs) on all high-cost mortgages with terms under five years. It also outlaws negative amortization plans, which allow build-ups of debt by adding unpaid interest into the principal balance.

The bottom line: At least a modest new safety net for homeowners who need to borrow money, but who should never be sacked with effective rates in the 20% and 30% range.

Distributed by the Washington Post Writers Group.