Subprime Lender Washington Mutual Looks Carefully at the Disclosure Practices of its Brokers

Beginning on Tuesday, October 2nd, Washington Mutual announced that it would begin requiring its network of brokers to disclose more information to consumers about loan products prior to closings.  Washington Mutual and other subprime lenders are facing mounting pressure from law makers and consumer advocacy groups for failing to adequately educate consumers about the loan products to which they are committing.  There is rising sentiment that this failure to disclose and educate is a big reason for the fact that the foreclosure rate is currently at its highest point in five years.

Of course, the federal “Truth in Lending Act“, commonly known by its initials as “TILA”, has been around since 1968 and supposedly protects consumers from failures by brokers and lenders to disclose essential loan terms, including an accurate and understandable interest rate, whether the interest rate is a fixed rate or instead changes during the life of the loan, all necessary loan documents, the total finance charge, etc.   TILA has done a fairly decent job over the years gives consumers some fairly potent remedies in the event of a violation.  However, the drafters of TILA may not have anticipated the exotic mortgage loan products which have become the staple of the subprime lenders over the last five or six years. 

The fact is that TILA does not do much to protect consumers from loans where the interest rate “adjusts” over the life of the loan.  As indicated above, mortgage loans with flexible rates have been the bread and butter of the supbrime lenders over the last five or six years.   Unfortunately, TILA did not do much to protect consumers who bought into these kinds of loans.  It has been common industry practice for commission drunk brokers to induce consumers with “teaser” rates which in some cases are in effect for only the initial month of the loan.  In other cases, brokers sold 2/28 loans where the payment was fixed at a fairly low amount for the intial two years but then suddently “reset”, in some cases causing the monthly mortgage payment to increase by 50% or more.  TILA does not require brokers to inform consumers in plain english and dollars and cents exactly what will happen to the mortgage payment once the interest rate resets. 

Thankfully, WAMU is responding to some of the pressure and is at least recognizing the need for more disclosure to consumers.  Whether the industry will follow, or whether Congress will impose new laws, is currently unknown.  One thing that is certain is consumers are increasingly seeking options for dealing with payments that have increased far more than expected.  In some cases, bankruptcy can help consumers in these situations.  Furthermore, there is legislation pending in Congress that may give United States Bankruptcy Courts more power over subprime loans with flexible interest rates and other undesirable terms.