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Mortgage Rules Should Stop Nasty Surprises

The Federal Reserve has revised the disclosure requirements for mortgages to protect consumers from non-refundable fees and higher interest rates.

The new rules — which also apply to home equity loans but not home equity lines of credit — took effect July 30. They require lenders to:

  • Provide a good faith estimate (GFE) of a mortgage’s full cost within three business days of receiving an application.
  • Not charge any fees until consumers receive the GFE. New mortgage rules The only fee lenders can ask for upfront is a “reasonable fee” for obtaining the consumer’s credit history.
  • Wait seven business days after providing the initial loan costs before closing the loan.
  • Offer a new estimate of the loan costs three business days before the closing date if the original annual percentage rate (APR) increases by more than one-eighth of a percentage point.

The changes will stop lenders from springing a higher interest rate on customers at the closing, when they’re under intense pressure to proceed with the purchase regardless of the cost.

They should also prevent mortgage brokers from deliberately underestimating interest rates to collect hundreds of dollars in non-refundable fees before revealing the true cost of the loan in the GFE.

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Comments (1)
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One Existing Comment
  1. Ian said:
    on August 6th at 01:25 pm

    Some feedback on the information above – the three day initial disclosure requirement has always been in place, this is not a new requirement. The point about not being able to collect an application deposit other than for a credit report is true, but inconvenient. After all, why would you ever pay an application deposit without first understanding what it is for? Now you have to either make a separate trip to the lender or drop a check in the mail three days after disclosures in order to continue processing your loan, which could be a problem if you have made an offer with a short window to close.

    The third point and fourth points are also correct, but keep in mind that many states also have a Right to Cancel a loan, particularly on refinance transactions for a primary residence that will further delay loan funding.

    Bottom line – why is this government regulation helpful? Until you sign on the dotted line you aren’t obligated to take a loan, and none of this regulation stops brokers from underestimating fees in order to collect non-refundable deposits (another upcoming regulation will, though it has problems of its own). While I understand that sometimes people may feel pressure to close a loan right then and there these regulations have the potential to make it more difficult for good borrowers and good lenders to work together.

    The best solution is to have educated borrowers rather than regulating away as much as possible. After all, the lenders that made bad decisions are going out of business or are otherwise learning their lessons (except for the too big to fail people who are another problem entirely). The effect of these new regulations will be to make business more difficult for many of the lenders who did it right in the first place. This is nothing more than political grandstanding to make voters think that government is actually doing something helpful.