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Mortgage Lenders Must Tell Borrower 'Worse Case' Payment

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The Federal Reserve Board ruled today that for mortgage applications received from Jan. 30, 2011, mortgage lenders must disclose all potential costs a borrower will face over the lifetime of the loan. However, the Fed suggests it may be better to start implementing the rule now. It comes as part of a wave of mortgage disclosure requirements the Fed published today. Under the new rule for adjustable-rate loans, as well as any where terms may change greatly, lenders must disclose the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan. This includes any balloon payments due as well as stipulations that dues may go up in the case that the borrower makes minimum repayments. Products such as 30-year fixed will still be allowed to use payment schedules, but for mortgages such as those above, interest rate and payment summary tables will be mandatory. Wording to clarify that escrow accounts are estimations of upcoming fees is also required. The interim rule revises disclosure requirement under the Truth in Lending Act (Regulation Z). The new Mortgage Disclosure Improvement Act (MDIA) is an amendment to TILA, under the recently passed Dodd-Frank financial reform. The Fed is inviting lenders to start implementing the rule before the deadline and is also inviting comment for the next two months before a decision regarding the permanency of MDIA is finalized. The mortgage finance industry, so far, has offered little comment on the payment schedules, unlike consumer advocacy groups, the interim rule documents state. The Fed did receive some commentary: "One bank indicated that the content of the table would be duplicative of the information presented in the good faith estimate of settlement costs and the HUD-1 settlement statement required under Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), but that the information is presented differently," states the new rule. "This commenter also questioned the inclusion of taxes and insurance in any but the initial payment disclosed because of the fact that those amounts can change significantly over the life of the loan." MDIA is the result of borrower consultations. The Fed contracted consulting firm, ICF Macro, to conduct the necessary research back in 2007. Write to Jacob Gaffney.

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