Skip to Highlights
Highlights

Alternative mortgage products (AMPs) can make homes more affordable by allowing borrowers to defer repayment of principal or part of the interest for the first few years of the mortgage. Recent growth in AMP lending has heightened the importance of borrowers' understanding and lenders' management of AMP risks. This report discusses the (1) recent trends in the AMP market, (2) potential AMP risks for borrowers and lenders, (3) extent to which mortgage disclosures discuss AMP risks, and (4) federal and selected state regulatory response to AMP risks. To address these objectives, GAO used regulatory and industry data to analyze changes in AMP monthly payments; reviewed available studies; and interviewed relevant federal and state regulators and mortgage industry groups, and consumer groups.

Skip to Recommendations

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Board of Governors As the Federal Reserve begins to review and revise Regulation Z as it relates to disclosure requirements for mortgage loans, the Board of Governors of the Federal Reserve System should consider improving the clarity and comprehensiveness of AMP disclosures by requiring language that explains key features and potential risks specific to AMPs.
Closed - Implemented
On July 23, 2009, the Board of Governors of the Federal Reserve System proposed new rules intended to improve the disclosures consumers receive in connection with closed-end mortgages. The proposed rules would improve the clarity and comprehensiveness of AMP disclosure by requiring that explains the key features and potential risks to AMPs. Specifically, the rules would require lenders to provide a one-page list of key questions to ask about the loan being offered. The information consumers receive within three days after application would be streamlined to make it easier for customers to use. Lenders would be required to highlight risky mortgage features, such as possible payment increases or negative amortization associated with AMP products. For adjustable-rate mortgages (most AMPs have this feature) the lenders would be required to show consumers how their payments might change, by disclosing the highest monthly amount the consumer might pay during the life of the loan.
Board of Governors As the Federal Reserve begins to review and revise Regulation Z as it relates to disclosure requirements for mortgage loans, the Board of Governors of the Federal Reserve System should consider improving the clarity and comprehensiveness of AMP disclosures by requiring effective format and visual presentation, following criteria such as those suggested by the Securities and Exchange Commission's "A Plain English Handbook."
Closed - Implemented
On July 23, 2009, the Board of Governors of the Federal Reserve System proposed new rules intended to improve the disclosures consumers receive in connection with closed-end mortgages. The proposed rules would improve the clarity and comprehensiveness of AMP disclosure by requiring that explains the key features and potential risks to AMPs. The proposed rules would require lenders to revise the formal and content of current adjustable-rate disclosures (most AMPs). Specifically, the disclosures would be required to be in a tabular question and answer format, include a plain-language disclosure of interest rate and payment information, and a new disclosure of potentially risky features. The proposed rules would also impose certain minimum font size requirements to ensure readability. These proposals meet the spirit of the the "Plain English Handbook" and would provide a more effective format and visual presentations of AMP mortgage disclosures. In February 2011, the Federal Reserve announced that it did not expect to finalize pending rule changes under Regulation Z of the Truth in Lending Act (TILA) that would have mandated new consumer disclosure requirements for, among other things, closed-end mortgage loans. According to Federal Reserve officials, this decision was made because general rulemaking authority for TILA and federal jurisdiction over consumer financial protection was scheduled to transfer to the newly created Consumer Financial Protection Bureau in July 2011. Nevertheless, the Federal Reserve had taken action by proposing a rule.

Full Report