Fed Enhances Mortgage Disclosure Rules
Consider this post a continuation of yesterday’s post, both of which aim to educate you on your rights as a (potential) mortgage borrower. Much like you are entitled not to be discriminated against, you are also entitled to honesty. Towards this end, the Federal Reserve Bank recently revised the Truth in Lending Act in the form of the Mortgage Disclosure Improvement Act.
Under this rule, “creditors must give so-called ‘early disclosures,’ or good faith estimates of mortgage loan costs, within three business days of receiving an application and before collecting any fees from a consumer in accordance with the Truth in Lending Act (TLA)…The final rules also require creditors to wait seven business days after they provide early disclosure before closing the loan and to provide new disclosures with a revised annual percentage rate (APR) — and wait an additional three days before closing — if any change occurs that makes the original APR inaccurate.”
Formally taking effect on July 30, 2009, the rule takes power away from banks and mortgage brokers and returns it to mortgage borrowers, by making the mortgage process more timely and straightforward. Consumers are now legally entitled to good faith estimates within mere days of filing a mortgage application. This is a reasonable requirement, since mortgage applications are inherently time-consuming, and can damage one’s credit score when a credit report is pulled.
When applying for a mortgage, it is recommended that you seek estimates from at least three potential brokers/banks, even if such banks discourage you from doing so. Under the amended rule, you will now be able to review/compare the resulting estimates almost immediately, in order to make an informed decision about which mortgage is most competitive.
Furthermore, mortgage providers will be barred (via a 1-week moratorium) from trying to pressure you into closing right away. During this period, it goes without saying that you should review the terms/costs of each mortgage very carefully. Before agreeing, make absolutely sure that there are no junk fees and questionable terms; signing your name will essentially commit you to the loan, regardless of whether the mortgage is actually fair. In other words, this rule change won’t protect you from exorbitant fees if properly disclosed and consented to. Pay special attention to ‘processing’ and ‘administrative’ and ‘transfer’ fees, which are almost always bogus.
Bank of America is among the banks taking the lead in implementing the Fed’s new disclosure requirements. Its website includes a home loan guide, and its new disclosure forms aim to explain mortgage terms in plain English, minus the legal jargon and fine print. Fees and costs should be broken down explicitly, along with broker commissions.
Meanwhile, “If the borrower has applied for an adjustable rate mortgage — where the rate varies, typically after a set period of five or seven years — the summary discloses the maximum possible monthly payment.” Personally, this strikes me as very reasonable, considering that the subprime crisis was at least partially caused by overly optimistic assumptions about adjustable rate mortgages. Specifically, holders of such mortgages assumed (and/or were misled into believing) that interest rates (and hence their monthly payments) wouldn’t rise much from the initial low base. When rates rose, naturally, many such borrowers were caught off guard.
It’s impossible to predict the extent to which other banks will follow the lead of BofA. Given the extensive fallout from the real estate crisis (now measured in Trillions of Dollars), however, it is probably now in the interest of banks, themselves, to make sure that consumers understand the terms of their mortgages. While banks are no doubt profit-maximizing, it is still in their best interest to avoid foreclosures by making sure that borrowers can ultimately repay their loans.