Bill Would Tighten Home Loan Rules

If a bill introduced by Rep. David Price (D-N.C.) becomes law, home-equity loans will be made subject to the federal Truth in Lending Act, and lenders then would be required to publish “conspicuous” statements about rates and changes.

For instance, the bill would affect disclosure of pertinent maximum annual percentage rates, any possible changes in that rate and an example of how such rate changes would affect monthly loan payments. Furthermore, the Federal Reserve Board, which has jurisdiction over Truth in Lending, would develop a booklet describing the home-equity loan procedures.

In addition, the legislation offered by Price would require information disclosure on deductibility of home-equity loan interest and warn the borrower that collateral for the loan is the borrower’s residence, with the explanation that in the event of a default, the borrower risks loss of the house.

A first-term member of Congress, Price is a member of the House Committee on Banking, Finance and Urban Affairs. The well-named Home Equity Loan Consumer Protection Act of 1987 was prompted, according to Price, by the lack of uniform disclosure regulations that struck him as “an obvious gap in the law.” Price added: “Home-equity loans are unique financial products, and due mostly to recent changes in our tax laws, the market for those loans has exploded.”

One provision of the Price bill would require all advertising of home-equity loans to include disclosure of all prospective fees and interest charges. Also any advertised reference to tax deductibility of such interest on those loans would be required to include a “clear and conspicuous” statement that such interest may not be completely deductible for all taxpayers.

Another bill, called the Residential Mortgage Credit Fairness Act of 1987 and introduced in the House of Rep. Dean Gallo (R-N.J.), would ban last-minute changes in interest rates for persons buying a house at a time when interest rates are rising, such as happened last spring.

In effect, the Gallo bill would require that mortgage lenders make good on the rate, as promised at the time of loan application, or face a substantial federal fine. That simply means that a couple or person who could expect the closing rate to be the same as the reasonable estimate. That loan might have a 10% rate, with two discount points to be paid by the buyer, on a 30-year mortgage of $80,000 on a $100,000 house.

In other words, there would be no permitted change in terms and conditions of the mortgage from that quoted at the time of application until the loan is formally made--often weeks or even months later.

Sometimes, when mortgage interest rates are rising, the lenders delay closing in order to permit the guaranteed locked-in rate time period (often for 30 to 60 days) to expire--thereby enabling the long-term mortgage rate to be raised. This procedure has been known to cost some home buyers as much as one or even two percentage points of interest--or some “points” paid at settlement to keep a mortgage rate lower.

Meanwhile, the House Ways and Means Committee has been studying ways of raising an additional $19 billion to reduce the U. S. budget deficit. One possibility is to restrict interest deductibility to loans to buy, build or improve a principal or second residence.

That means, according to veteran lobbyist Burton C. Wood, that the interest on cash taken out of a home and used for other purposes (often the case with home-equity loans) would not be tax deductible.

Wood said that home-equity loans would thus be discouraged, and home buyers would be encouraged to make low-as-possible down payments on their house because cash tied up in a house would make it unavailable for other uses. Borrowing money for uses other than a house purchase is already discouraged by the 1986 tax reform law that made consumer loan interest non-deductible.

In his role as a senior staff vice president for the Mortgage Bankers Assn., Wood commented, “The homeowner who has little money invested in the house is most likely to walk away from a loan.”