Home Mortgage Consumer Protection

§1. What’s Going on Here?

This is a summary of discussion on the “For All Borrowers: Adjustable Rate Mortgages” post from August 10 to October 3, 2012. (On that date, the post was closed to further discussion.) It was written by the Regulation Room team. This version is a DRAFT. Please help make sure that nothing is missing, wrong, or unclear. You can propose changes to this version until October 8.

The goal is to give CFPB the best possible picture of the different views, concerns, and ideas that came out during the discussion. This is NOT the place to reargue your position or criticize a different one. Focus on whether anything is missing or unclear, not whether you agree or disagree.

On October 9, the Final Summary will be posted on Regulation Room and submitted to CFPB as a formal comment in the official rulemaking record. (October 9 is the last day of the official commenting period.

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§2. The underlying problem

As in the Options for Avoiding Foreclosure discussion, a theme in comments here was that, while disclosure is important and generally supported by commenters, there are underlying problems that the proposed rule doesn’t address. One commenter, self-identified as a comsuner who was laid off and was currently disabled, who got or refinanced a mortgage in the past 10 years, and who “currently rents out the house they own while living with family,” urged CFPB also to ensure that consumers conduct a “reality check” before committing to an ARM:

“I suspect that many people who take out an ARM do not fully consider the risk of future rate increases. Especially with the currently low rates (and potential for higher long-term inflation), ideally a prospective customer should perform a ‘stress-test’ on their own financial situation, and ask realistically could they afford the loan if rates climb in the long term, and specifically how they would accomplish this. An alert is nice, but the options are far greater before the agreement is signed.

“Therefore, my recommendation would be to put equal–or greater–emphasis on clear communication and discussions of options before the loans are signed, with a focus on worst-case increases. e.g. ‘If rates do climb substantially, and your ARM rate goes to its highest allowed level of __X%__, your monthly payment would be __$xx,xxx__. In that scenario of higher rates (and likely higher inflation), what would you have to do to ensure you can still make payments?’ Even if the prospective customer doesn’t provide an answer to the loan officer, that might trigger some very useful discussions among spouses, co-signers, etc. …

“Another way to make prospective customers more aware of the risks would be to ask ‘Assuming your loan payments do increase steadily if rates rise, at what level (of monthly payment dollars) would you need to either sell the house, allow foreclosure, or request modification of terms?’ (i.e. how much of an increase could you really afford.) Requiring a prospective borrower do the math might be a useful reality check – even if the person fudges the numbers, at least the issue will have been implanted in their head.”

Another commenter (a consumer who got or refinanced a mortgage in the past 10 years) similarly focused on alerting borrowers earlier to the real risks:

“When our family went through this, the people representing the lender told us: ‘don’t worry about ARM’s, you can always refinance later.’ Of course, once the collapse hit, refinancing became not an option for many. The wording should specifically say something like: ‘WARNING: you may not be able to refinance later, so you should expect to have to make the higher rate payments later.’ ”

A third, who made the comment about “streamlining” the notice forms, and who “strongly support[ed] the concept of advanced notice on the ‘price shock,’” concurred: “presenting the critical information upfront, in a standard form single page 10-12 point font that emphasizes the reality of the financial agreement they are being presented with” is what would have the “real practical force and effect.” S/he urged that it should contain information such as “[Y]our mortgage will increase if you pay only x.”

§3. Specific suggestions about the proposed model notice

One commenter (consumer who got, or refinanced, a mortgage in the past 10 years and who has had, or someone in their family has had, a hard time making mortgage payments) commented that it was “about time something is done to reign in these servicers;” the proposed regulations are “a good start.”

In terms of specifics:

One commenter (consumer who got or refinanced a mortgage in the past 10 years, had personal or family experience with foreclosure, in a household making less than $100,000/year), said he hoped the sample form is “a working draft” and that CFPB should “[k]eep working towards streamlin[ing].” S/he would like to see a “matrix/table form that presents the information that the consumer cares about most” – in his/her view, as arranged by “priority”:

1. Table 1: “how much” the rate would increase, “how soon” the rate would take effect, the present balance of the loan, and “1-2 scenarios for princip[al] balance after next successful payment.”
2. Table 2: the “rate benchmark,” “past/present/projected rates,” and “cost differential for the monthly payment based on the current vs. projected rate”
3. Third priority: “All the background and explanations.”

Another commenter (consumer who got, or refinanced, a mortgage in the past 10 years and has had personal or family experience with foreclosure) thought the form was “a great start,” but suggested:

1. Bold “the items that propose the Alternatives i.e. refinance, modification etc. … because they are important options.”
2. Referring consumers to additional resources, specifically, reminders “that there are various websites, such as bankrate.com that can give them information about prevailing rates” and “putting a representative picture of a posted LIBOR rate from wsj [Wall Street Journal].

§4. Timing of notice

A commenter who works for a credit union whose customers are mostly from the local community warned: “It would be impossible to give a 60 day notice on a rate change, when the index you use is supposed to be 45 days prior to the change date, as written in the original note signed by the borrower.”

The commenter who made the suggestions about amending the notice to bold the “Alternatives” text and include resources on prevailing rates was concerned whether notice 2-4 months in advance of the adjustment was really enough time for a borrower to sell their home. S/he queried whether it was possible to give a total of 6 months before the increase takes affect if the borrower is trying to sell.