August 30, 2010 in Mortgages

The Federal Reserve has proposed a rule that would give consumers the right to cancel mortgage applications within three days and get refunds of fees.

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Under the proposed rule, consumers could apply with two or more lenders, pay various fees, then cancel all but one application and get refunds from the rejected lenders. Application, appraisal and other fees would be refundable; credit reporting fees would not be refundable.

According to Bankrate’s 2010 Closing Costs Study, the average appraisal costs $377, while application fees average $343. Credit report fees — which would not be refundable — averaged $18 in the Bankrate survey.

Most lenders bill borrowers directly for credit reports and appraisals. Some, but not all, lenders charge application fees.

Jeff Lazerson, president of MortgageGrader.com, an online brokerage based in Laguna Niguel, Calif., says the proposed rule’s impact might be blunted by the fact that most reputable lenders wait three or more days to collect fees anyway.

“For the consumer, it’s not bad, because it’s going to help pave the way for them to find their best loan,” Lazerson says. “For the lenders it’s going to make them a little crazy because they’re going to be spinning their wheels a lot … but we end up doing that today, anyway.”

The proposed rule was “well-telegraphed,” says Dan Green, loan officer for Waterstone Mortgage in Cincinnati. That’s why his company, and many other lenders, already wait three days before they charge fees.

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Direct effect

The proposal was included in a 930-page document the Fed published in the Federal Register in the middle of August. The book-length Fed document finalized some rules that had been proposed a year or more ago, clarified a few regulations and proposed some new ones.

Many of the rules affect consumers only indirectly. The Fed’s proposal to give consumers the right to cancel applications within three days is an exception. By imposing a three-day shopping period, it would affect consumers directly.

Shoppers would be entitled to refunds if they cancel an application within three business days of receiving a pair of disclosures: the good faith estimate and the Truth in Lending Act statement. (In lender lingo, they’re called the GFE and the TILA.)

There are nuances regarding the definitions of “three business days” and “receiving the early disclosures.” A business day is any day that’s not a Sunday or holiday. To be on the safe side, consumers should assume that the three-day clock begins ticking the day they apply.

The Fed says it’s making the proposal to help consumers comparison-shop for mortgages and save money, saying the proposal gives consumers time to review the terms of the loan and make a decision “without feeling financially committed due to having paid an application fee.”

The proposal is just the latest effort on the part of regulators to make it easier for consumers to comparison-shop mortgage offers.

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By encouraging borrowers to shop for loan deals, the regulations are slowing the process of getting a mortgage. Rulemakers say the slowdown is worth it if consumers get better loan deals.

Help or hindrance?

However, Brian Koss, executive vice president of Mortgage Network, in Danvers, Mass., is critical of the proposed rule change.

He says the rule is “meant to protect the consumer, but will end up costing them more and causing confusion and pain.”

According to Koss, “All it’s going to do is delay anybody from doing anything.” Lenders will merely delay ordering appraisals, Koss says, “elongating the process.”

The Fed, in its proposal, acknowledges the rule could slow things down. But a similar right to a refund already applies to home equity lines of credit, and it “does not seem to have caused undue delays or burdens for consumers,” the Fed proposal says.

The proposal has a 90-day comment period that ends in mid-November. Sometime after that, the Fed may amend the proposal and seek more comment, adopt it with or without amendments, or shelve it. There is no deadline for a final decision.

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The proposed rule faces one specific potential bump in the road. At some point, the new Consumer Financial Protection Bureau, or CFPB, will begin operating. It will have the prerogative to alter or withdraw the proposed rule. But the CFPB is likely to draw its staff from existing regulatory agencies, including the Fed.

Shift in emphasis

This rule is an example of a change of emphasis from regulators. In past years, mortgage regulations were designed primarily to stop lenders from treating consumers unfairly. Rules blocked racial discrimination and overcharging for fees.

Regulators still go after discrimination and overcharging, but in the last two years the emphasis has shifted to making it easier for consumers to shop and compare mortgage offers.

For example, a 2008 rule clarifies the way finance charges and annual percentage rates, or APRs, are calculated. A 2009 rule requires lenders to provide good faith estimates when the borrower initially applies, and again whenever the APR changes by one-eighth of a percentage point or more.

Since the beginning of 2010, lenders have been required to use a revamped format for the good faith estimate. The new GFE encourages borrowers to shop for competing quotes of rates and fees.

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