Mortgage lenders may be taken by surprise by new disclosure requirements that take effect on Oct. 1, industry observers say.
The measures, which will become part of the Truth-in-Lending Act, are mostly meant to attack unfair lending practices in high-cost mortgages by curbing some activities and requiring fuller documentation for others. The new statute applies to higher-risk second mortgages and refinancings.
The requirements are part of the Riegle-Neal Community Development Financial Institutions Modernization Act adopted last year and being implemented over the next few years.
While few quarrel with the spirit of the law, bankers may not realize how far they must go to comply with its high-cost-mortgage provisions, analysts said.
If interest rates spike, some lenders may end up making high-cost mortgages without realizing they are doing so and without making required disclosures, said Paul Mondor, an associate director at the Mortgage Bankers Association of America.
These lenders face "great liability" for their inadvertent actions, Mr. Mondor said.
The new statute defines a high-cost mortgage as one with interest rates 10% higher than that on the comparable Treasury instrument, or with fees or points exceeding 8% of the amount financed. In addition to setting parameters, the law prohibits prepayment penalties and large balloon payments.
Bankers face considerable problems if they do not follow even the tiniest details, Mr. Mondor said.
For instance, after agreeing to the loan, borrowers are given three days to review disclosure documents and turn down or accept the loan. If market rates change, the paperwork must be redone to reflect the pricing shift, and the three-day period starts again.
"You can have something very minimal, even a one-cent difference, and that's considered inaccurate" on the disclosure documents, Mr. Mondor said.
A number of bankers said they were not aware of all details in the new law, but that they expected to get up to speed in coming days.
One banker said he had turned up a little-noted provision that has ramifications for all lenders, no matter what type of mortgage loan.
If mortgage bankers charge more than a baseline amount of points and fees, they must provide borrowers with a statement that shows what the fees are used for, said Allen Hardester, director of marketing for Coastal Mortgage Corporation of Maryland, Baltimore.
The baseline is to be based on a community average determined by the Federal Reserve Board, he said.
The provision gives borrowers something they have lacked in the past, he said. "The consumer now has a single provision to determine what the broker or lender is doing."
But bankers and brokers must make sure they make the disclosure or risk lawsuits by customers who find out about the provision later on, he said.