The federal government’s latest loan disclosure rules should give borrowers some welcome relief from upfront loan fees that lock them into a specific lender and costs that unexpectedly escalate at closing. But these same rules also could cause some loan closings to be delayed.
The improved disclosures should benefit borrowers who are offered a subprime or other nonstandard loan or are worried about being hit with costs that suddenly escalate at closing, according to Marx Sterbcow, managing attorney at Sterbcow Law Group, a real estate law practice in New Orleans.
“It’s a good law for loans that were Alt-A or subprime or had prepayment penalties and also for prime loans where some knucklehead would (estimate) a 1 percent origination fee only (for the borrower) to find out at the last minute that the loan origination fee is 3 percent. It will cut down on some of that,” he says.
More loans trigger truth in lending requirement
The new rules, which are part of the amended federal Truth in Lending Act, also known as Regulation Z, were enacted July 2008 and became effective July 2009. Most of the rules concern the Truth in Lending, or TIL, statement, which lenders must give borrowers when they apply for a loan. The TIL discloses the annual percentage rate, or APR, finance charges, amount financed, total payments, payment schedule and other loan terms.
One of the biggest changes is that lenders must now provide a TIL statement for all types of closed-end residential real estate loans, rather than just home purchases. That means borrowers now will get a TIL for the purchase of a second or vacation home or a refinance. Commercial property loans and home equity lines of credit, or HELOCs, are still exempt.
Fees paid only after disclosures
Another big change is that lenders can no longer charge upfront fees — other than the cost of a credit report — until after the borrower has received the TIL. If the lender sends the TIL by U.S. mail, it’s deemed to be received after three days. If it’s sent electronically, it may be deemed to have been received sooner if the borrower acknowledges receipt of it.
This so-called “three-day rule” should give borrowers a better chance to shop for a loan and compare loan offers because they won’t be charged an application or appraisal fee until after they receive the TIL.
That’s “a good thing for borrowers — not great, but good,” says Don Frommeyer, senior vice president of AmTrust Mortgage in Carmel, Ind.
Frommeyer’s hesitation arises because he believes borrowers need to make careful comparisons of loan offers. For example, if one loan has an interest rate of 5.5 percent and an APR of 6.1 percent and a comparable loan has an interest rate of 5.375 percent and an APR of 6.95 percent, the borrower should realize that the lower interest rate on the second loan comes at the cost of higher fees.
Borrowers also should realize that the lender likely won’t order the appraisal until the TIL review period is over and the borrower has paid the appraisal fee. That — and other new rules that affect appraisals — could cause delays, Sterbcow warns.
Change in APR restarts clock
Yet another new rule is that if the APR changes by more than 0.125 percent, the lender must give the borrower an updated TIL, after which the loan cannot close for at least three days.
The APR could change due to a change in the interest rate, loan program or loan-related fees, the last being the most common reason, according to Randi Bennett, an escrow officer at First Centennial Title Co. of Nevada in Reno, Nev.
The additional disclosures should ensure that borrowers receive more accurate information about loan costs and reduce the incidence of surprises at closing. That would be a huge benefit for borrowers, some of whom, Bennett says, have broken into tears in her office when they’ve received the final statement of closing costs.
“The lender hasn’t prepared them for the costs, and they are shocked,” she says.
Borrower not required to close loan
Another new rule requires a clear disclosure on the TIL that states: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.”
While that may seem obvious, it could protect some novices from feeling that they are obligated to sign loan documents they don’t understand or accept a loan they may later regret.
New rules could cause delays
Perhaps the most controversial new rule is that a loan now cannot close for at least seven days after the initial TIL has been provided. This rule is meant to slow down the process, so borrowers will have time to digest the TIL and make sure they understand the terms and costs of the loan.
That’s a good protection, but the concern is that these inflexible three-day and seven-day time periods could cause costly delays. Bennett cites a short sale that’s contingent on the approval of the seller’s lender as an example. She says some lenders insist that the sale close within 15 days and impose a penalty on the buyer if there is a delay.
“If the TIL from four months ago was wrong by 0.125 percent, (the seller’s lender) isn’t allowing extensions or there is a $100 per day penalty if the short sale is delayed,” she says.
A delay of even one day could be especially costly for borrowers who want to close a so-called “streamlined” refinance of a loan that’s guaranteed by the Federal Housing Administration, or FHA. Frommeyer says most FHA streamlined refinances close within the last three days of the month.
“If you miss that date, you have to wait another whole month or you are going to pay another whole month of interest just to close because the FHA gets all of their interest for that month. You are probably going to blow a rate lock too,” he says.
Emergency exemption may be mythical
The new rules allow borrowers to expedite a loan closing if they have a “bona fide personal financial emergency” and if they sign a written waiver that describes the nature of the emergency and is not on a preprinted form.
The classic example of such a situation is a speedier closing of a refinance loan to stop an imminent foreclosure sale of the borrower’s home. The Federal Reserve has stated that this example is “merely illustrative,” but hasn’t published any other examples of emergencies that would qualify. For instance, Bennett poses the question of whether urgent medical care might make the cut. At this time, the answer isn’t clear.
The question may turn out to be moot because lenders aren’t likely to allow borrowers to expedite a closing, emergency or not, according to Sterbcow.
“The lenders don’t want anything to do with the financial emergency exemption even though it’s written into the law. The liability is too high,” he says.
Lenders may have some cause for such fears because the Federal Reserve has expressly rejected the idea that such a waiver would insulate the lender from liability. That could prove problematic for borrowers who have a legitimate need to close a new loan in a hurry.
Check the latest mortgage rates.
Calculate your home’s loan to value.