The Federal Reserve Enacts New Mortgage Disclosure Regulations to Protect Consumers
Have you ever gone to settlement on a home, only to find the interest rate and Annual Percentage Rate (APR) were higher than what you were originally quoted by your loan officer, ultimately resulting in a higher monthly mortgage? Well, as a real estate agent, I have seen situations such as these far more often than I care to discuss. I have had clients threaten to walk out in the middle of transactions because of such practices―and who could blame them? In May of 2009, the Federal Reserve finalized amendments to the Truth in Lending Act through the Mortgage Disclosure Improvement Act. These amendments ensure borrowers are well informed about mortgage costs and fee disclosures before they sign on the dotted line.
A Truth in Lending Primer
There are legislative acts/regulations that impact you as a consumer when your settle on a mortgage loan for a residential property.
Truth in Lending Act
The Truth in Lending Act (TILA) of 1968 is a federal law designed to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. Among its key provisions, the lender must disclose to the borrower the APR, which reflects the cost of the credit to the consumer because it contains things other than interest such as origination fees and discount points (such as mortgage insurance).
Regulation Z
This regulation implements the consumer credit protections in the Truth in Lending Act. Regulation Z requires that lenders must:
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Give borrowers written disclosure on essential credit terms including the cost of credit expressed as a finance charge and an annual percentage rate.
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Respond to consumer complaints of billing errors on certain credit accounts within a specified period.
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Identify credit transactions on periodic statements of opened credit accounts.
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Provide certain rights regarding credit cards.
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Inform customers of the right of rescission in certain mortgage-related loans within a specified period.
Home Ownership and Equity Protection Act (HOEPA)
HOEPA was enacted in 1994 in response to Congressional concerns over “reverse redlining, the practice of targeting residents in disadvantaged communities for credit on unfair terms, and in particular by second mortgage lenders, home improvement contractors, and finance companies. Lenders were believed to peddle high-rate, high-fee home equity loans to cash-poor homeowners. HOEPA establishes a class of residential mortgage loans that are subject to special disclosures and other requirements.
So What’s New? The Mortgage Disclosure Improvement Act of 2008
While existing regulations required lenders to disclose loan fees and costs, the regulation was more flexible as to when these disclosures were made. Before changes in these regulations, some borrowers were not informed about changes interest rate, APR, or fee increases until the day before, and frequently the day of, settlement. Borrowers were sometimes coaxed to accept the new terms or forced, by de facto, because they had packed their belongings, the moving truck was parked outside, and they’d sold their homes. New changes in these regulations are generally geared toward ensuring that the consumer is informed about all loan-related fees and costs before they get to the settlement table.
New stipulations include:
· The lender must provide the borrower with an initial Good Faith Estimate (GFE), a list of all fees the buyer and seller are responsible for in the loan transaction, by three business days after they have completed the loan application and before the lender collects any fees, with the exception of the cost of a credit report. For example, many lenders charge an application fee to process your loan. If the lender charges a $295 application fee and a $30 credit fee, the borrower does not have to pay the application fee until after he or she receives the good faith estimate; however, he or she would be responsible for the cost of the credit report.
· Lenders are required to issue the “final” GFE –either deliver them or place them in the mail—at least seven business days before closing. This ensures that the borrower has plenty of time to review the documents and get explanations on items of concern. So, if your lender sends out your GFE on a Monday, the earliest you can close is the following Wednesday.
· If the APR provided in the final GFE changes beyond the specified parameters for accuracy, the lender must provide a corrected GFE at least three business days before closing.
· These waiting periods can be waived by the borrower if the borrower is experiencing a personal financial emergency (such as a foreclosure) and needs to conduct an expedited closing. In such cases, the borrower(s) must write, sign, and date a statement indicating they consent to waving their waiting periods due to a personal emergency. The statement must be written by the buyer and cannot be a form letter. The regulations intentionally do not specify what these “emergencies” entail to allow flexibility.
Comments
KarlaB27
September 11, 2009
Hi Susan,
I'm glad that you've been enjoying the articles! I'm so passionate about real estate. It's truly a labor of love for me, so I strive to provide the latest and greatest. I hope you stay tuned!
Karla
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