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New Rules Give Buyers More Protection at Closing
By Kenneth R. Harney
Saturday, July 18, 2009
If you're
applying for a loan to purchase a primary or secondary
home, or planning to refinance, you should be aware of a
little-publicized new set of federal consumer-protection
rules that takes effect July 30.
Among
other key changes, the new Federal Reserve guidelines
require lenders to give you initial disclosures of your
mortgage costs within three business days of your loan
application. If you don't get them, you can pull the plug.
The rule
also prohibits lenders from collecting any fees, except a
reasonable charge for checking your credit, until you have
been given the loan-cost disclosures. This means no more
out-of-pocket, upfront application charges until you have
received the truth-in-lending disclosures and an annual
percentage rate (APR) calculation of those loan costs.
Since 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 rule also
prohibits quickie closings on loans by requiring a
seven-day waiting period after applicants are handed their
early disclosures or the disclosures are mailed.
You will now have up to 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. In fact, 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 itself -- which is the
financial ballgame for loan officers, real estate agents,
and title and escrow officials -- will be dependent upon
your receipt of the appraisal in advance. The exception
will be that 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
be required to "redisclose" -- provide you a corrected
version and allow you an additional seven business days to
consider the transaction before settlement.
What might cause the APR to increase following the
initial, early disclosure? Lots of things. If you allowed
your initial rate on the loan to float with the market but
rates increased, you would need to get an amended
truth-in-lending disclosure. Or if the lender got
inaccurate estimates of costs from a third-party
participant in the transaction such as the settlement or
escrow company. Or if unexpected, 11th-hour junk fees
materialize.
All of
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. Actual
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.
For example, if appraisers are backlogged and can't
produce valuation reports quickly enough, settlements will
have to be postponed.
Second,
the purposes of the rules are to afford consumers better
access to and more time to consider key elements of what,
for most people, are major financial transactions. There
might be fewer instances of last-minute closing-date
surprises on fees, where buyers are slammed with hundreds
of dollars of charges they never expected. But nobody can
say that for sure.
Finally, the rules may well trigger new waves of
litigation if lenders and their business partners are not
scrupulous in their compliance. There is an 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 were 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."
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