New Federal Mortgage Regulations Promise to Increase Transparency

On July 30, a new set of mortgage guidelines, mostly administrative in nature – will go into effect, under the auspices of the Federal Reserve Bank. I use the term administrative to describe the new regulations because they refer principally to the provision of mortgage information, rather than the provision of mortgages, themselves. [On a side note, this could be the last piece of mortgage regulation passed by the Fed, if the Treasury Department is able to convince Congress to legislate the creation of a Consumer Protections Agency. See related post.] In short, banks will be required to deliver a greater quantity of information to (potential) mortgagers, in a timely and upright manner.

“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.” Until this updated truth-in-lending disclosure (which must also include an APR calculation) has been prepared and sent out, lenders are prohibited from “collecting any fees — except a reasonable charge for checking your credit.” That means no up-front application fee, no appraisal fee, etc., until you have been officially notified of the total lending costs associated with the mortgage.

There are also several considerations that affect the timing of the mortgage process. First of all, lenders will be required to wait seven days after preparing the truth-in-lending disclosure before they can close the loan. If the APR changes by more than .125% from start to finish, you must be notified and given a fresh seven days to think it over. At least three days before closing, meanwhile, you must received the final truth-in-lending disclosure, which among other items, includes the real estate appraisal. Given that the appraisal now has the potential to make or break a deal (see Monday’s post: “Uproar over New Appraisal Rules could Spur Change“), this rule could have significant consequences.

Overall, the rule changes should increase transparency in the mortgage process, by serving to make borrowers aware of junk fees, and giving them enough time to potentiall having them removed. From a timing standpoint, “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.” According to one source, “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,” which could force lenders into compliance.