The Truth in Lending Regulation (a.k.a. Reg Z) had some changes go into effect for loans filed as of July 30, 2009. (DISCLAIMER ALERT) Now I’m no mortgage guy but I can spot a potential issue that buyers and sellers should be aware of and I think this is one of them.
So what is this Truth in Lending thing anyway? The basic purpose of the Truth in Lending Act (a.k.a. TILA) requires lenders of consumer loans to provide full disclosure of the total cost of credit in the form of an Annual Percentage Rate (a.k.a. APR). For instance, your local bank might advertise a 30 year loan at a rate of 4.750%. Add in fees and points, if applicable, and spread those out over the life of the loan and the corresponding APR advertised might be somewhere around 5.249%. The theory is that even if you shop around to another lender with a lower rate, their fees might be really out of whack so the APR gives the consumer a way to compare the true cost of borrowing from various lenders.
So what has changed? Well, the government has always required that lenders provide a good faith estimate (a.k.a GFE) to consumers within 3 days of applying for a loan. The GFE is meant to clearly disclose the itemized “estimate” of the dues, fees, insurance, pre-paids, and everything else that comprises the APR and the terms of the loan. The problem is they are merely estimates and subject to change, without penalty. So imagine a scenario where there is a shady lender who gets a naive first-time homebuyer (clearly not represented by us!) to the closing table with no choice but to sign a loan for twice the rate and fees they were quoted (clearly not one of our partner lenders!). Unfortunately people were and are that ugly. My interpretation is that the recent changes were primarily put into play to address this deception – good call by the Fed – but will it work or will it just work to confuse and complicate an already confusing and complicated process? Time will tell but it’s definitely something for buyers and sellers to be aware of since it might affect the timing for lenders to process loans.
The following are key highlights of the changes from the National Association of Realtors:
- The new requirements apply to all mortgages secured by a borrower’s home, including primary and second homes and refinancing. Investor loans continue to be exempt.
- Lenders must give good faith estimates of mortgage loan costs within three business days after the consumer applies for a loan (early disclosure). The lender may not collect any fees before the disclosure is provided, except for a reasonable fee for obtaining a credit report.
- The closing may not take place until expiration of a seven-day waiting period after the consumer receives the early disclosure.
- Consumers may shorten or waive the three-day and/or seven-day waiting periods for a “bona fide personal financial emergency,” but only after receiving an accurate TILA disclosure. In the final rule’s preamble, the Fed stated that it “believes waivers should not be used routinely to expedite consummation for reasons of convenience.” The Fed decided not to insulate lenders from liability even where a consumer modifies or waives the waiting periods.
- If the annual percentage rate (APR) changes by more than 0.125 percent, the lender must provide a corrected disclosure to the borrower and wait an additional 3 business days before closing the loan. The APR includes not only the interest rate on the loan but certain other costs related to settlement, so it will be important for any fees that affect the APR to be as accurate as possible, as early as possible, to minimize the need for a corrected TILA disclosure.
Need additional explanation? Check out our real estate resources for some excellent mortgage partners. Don’t get caught up with a bad lender!
