Borrowers to get protection from high rates and fees

NATION'S HOUSING

August 07, 1994|By Kenneth R. Harney

Washington -- 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 percent to 30 percent 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 sub-par credit 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 people 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.

Here's a quick overview of some of the new protections:

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 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 can hit 20, 30, 40 percent 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 and 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.

On all such high-cost mortgages, new disclosures will be required emphasizing the effective annual percentage rate plus a last-minute bail-out provision.

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 that 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 should never be sacked with effective rates in the 20 percent and 30 percent range.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071

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