3 days to cancel mortgage app

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Regulators want to give you the right to cancel a mortgage application within three days and get a refund of the fees you paid.

The little-noticed proposal was included in a 930-page document that the Federal Reserve published Monday in the Federal Register. Here’s the proposal; it’s a 6.9-megabyte PDF file.

The Fed’s Proustian tome is a catch-all document that finalizes some rules proposed a year or more ago, clarifies a few regs, proposes some new ones, and revises some rules to correspond with the new Dodd-Frank financial reform law. Among other things, the Fed instituted a rule, set down in Dodd-Frank, that bans mortgage brokers from charging fees to borrowers while also receiving rate-based commissions from lenders.

For consumers, the most far-reaching provision is the Fed’s proposal to institute what would be a three-day shopping period, in which consumers could apply with two or more lenders, pay various fees, and then cancel all but one of the applications and get most of their money back.

The Fed’s document reads:

For closed-end loans secured by real property or a dwelling, the proposal would require a creditor to:

  • Refund any appraisal or other fees paid by the consumer (other than a credit report fee), if the consumer decides not to proceed with a closed-end mortgage transaction within three business days of receiving the early disclosures (fees imposed after this three-day period would not be refundable); and
  • Disclose the right to a refund of fees to consumers before they apply for a closed-end mortgage loan.

That’s at the top of Page 6, if you’re consulting the original document.

The proposal means you would be able to apply with multiple lenders within three days and pay fees for a credit report, an appraisal and maybe rate lock. Then you could decide which loan to proceed with, and cancel the other applications. The lender would refund all fees except for the credit reports.

The Fed makes it clear (pages 38-39) that it’s making this proposal so it will be cheaper and easier for consumers to comparison-shop: “Mortgage loans are complex transactions, and thus the proposal would allow consumers time to review the terms of the loan and decide whether to go forward  without feeling financially committed due to having paid an application fee.”

This will inconvenience borrowers who are in a hurry. Lenders won’t hire appraisers until at least three days after application. That will slow things down. The Fed acknowledges this, and says that the freedom to shop outweighs the inconvenience of delaying an appraisal by a few days.