The Federal Reserve regulations require lenders to provide consumers with initial disclosures of their mortgage costs within three business days of their loan applications, among other changes.
By Kenneth R. Harney
July 19, 2009
Reporting from Washington -- If you're applying for a loan to buy a primary or secondary home, or planning to refinance, you should be aware of a little-publicized set of federal consumer-protection rules that take effect July 30.
Among other key changes, the new Federal Reserve regulations require lenders to provide you with initial disclosures of your estimated mortgage costs within three business days of your loan application. If you don't get them, you can pull the plug.
The rules also prohibit lenders from collecting any fees -- except a reasonable charge for checking your credit -- until you've been given the loan-cost disclosures.
This means no more out-of-pocket upfront application charges until you've received the truth-in-lending disclosures and an annual percentage rate (APR) calculation of those loan costs.
Because many mortgage brokers and lenders traditionally have collected fees covering appraisal, credit and various other charges at the time of application -- sometimes amounting to hundreds of dollars -- this will be a significant change in procedure for the lending industry.
The rules also prohibit quickie closings on loans by requiring a seven-day waiting period after applicants are handed their early disclosures or the disclosures are mailed. You'll have a week to think about the transaction and decide whether it's right for you. Final truth-in-lending disclosures are due three business days before closing.
Here's an even more sweeping change for applications on or after July 30: The new Fed rules require lenders to deliver a copy of the real estate appraisal to you three business days before the scheduled closing on the loan.
In the past, even though federal regulations guaranteed that consumers could request and obtain a copy of the appraisal, lenders and home buyers frequently ignored that right. Many consumers had no knowledge of this right because no one in the home purchase, financing or settlement process told them about it.
Now the timing of the loan closing -- which is the financial ballgame for loan officers, realty agents, title and escrow officials -- will depend upon your receipt of the appraisal in advance. The three-day rule can be waived if you don't think receiving the appraisal is necessary.
Another significant change under the new rules: If the APR on the early truth-in-lending disclosure increases by more than one-eighth of a percentage point (0.125), the lender will now be required to "redisclose" -- that is, provide you with a corrected version and allow you an additional seven business days to consider the transaction before settlement.
What might cause the APR to increase after the initial disclosure? Lots of things: Say you left your initial rate on the loan to float with the market, but rates increase.
You'll need to get an amended truth-in-lending disclosure. Or perhaps the lender got inaccurate estimates of costs from third-party participants in the transaction, such as the settlement or escrow company. Or say that unexpected eleventh-hour junk fees materialize.
All these events, which have been frequent sources of consumer complaints this decade, could force the lender to redisclose loan costs and set back timing for the settlement.
What are some of the likely repercussions of the Fed's new mandates? First, the traditional approach of aiming in advance for a date-certain settlement target for home loan transactions almost certainly will be affected.
Closing dates will be more closely tied to lenders' and settlement agents' accurate estimates and their ability to deliver disclosures and appraisals by the required dates. If appraisers are backlogged and can't produce valuation reports quickly, settlements will have to be delayed.
Second, the purposes of the rules are to afford consumers better access to, and more time to consider, key elements of what are major financial transactions for most people. There might be fewer instances of last-minute closing-date surprises on fees, where buyers are slammed with hundreds of dollars of charges they'd never expected. But nobody can say that for sure.
Finally, the rules may well trigger waves of litigation if lenders and their business partners are not scrupulous in their compliance. There is an active and aggressive segment of the legal profession that specializes in going after banks and mortgage companies for truth-in-lending violations. Don't be surprised if you hear of lawsuits seeking cancellation of mortgage deals because timing deadlines were not met or appraisals not received.
As David Berenbaum, executive vice president of the National Community Reinvestment Coalition, put it in an e-mail comment: "Consumer advocates will closely monitor" compliance with the new Fed regulations, and the lending industry can expect "civil litigation against bad actors."