Fed OK’s plan for simplified loans
WASHINGTON - The Federal Reserve approved proposals yesterday designed to make it easier for Americans with mortgages, or shopping for them, to understand how the loans work.
“Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,’’ said Fed chairman Ben Bernanke.
Among the changes, mortgage lenders would need to explain potentially risky features, such as prepayment penalties, of a mortgage in a one-page “plain-English’’ question-and-answer format before a consumer applies for a loan. Improved disclosure of the annual percentage rate, or APR, to capture most fees and settlement costs paid by the borrower also would be required.
For customers with adjustable-rate mortgages, lenders would be required to show consumers how their payment might change. For instance, by disclosing the highest monthly amount the borrower might pay during the life of the loan. Lenders also would have to notify customers 60 days in advance - versus the current 25 - of a change in their monthly payment.
Lenders would have to provide a monthly statement of payment options for customers with payments that do not cover the loan interest.
The proposal would ban certain payments to mortgage brokers and loan officers that are based on the loan’s terms or conditions, and would prohibit steering consumers to transactions that aren’t in their interest but would lead to increased compensation to the brokers and officers.
Michael Calhoun, president of the Center for Responsible Lending, a nonprofit that fights abusive financial practices, praised the Fed’s proposal, saying it holds “great promise for eliminating abusive and unfair practices.’’