House bill would close loopholes in federal law on home refinancing

March 22, 1992|By J. Linn Allen | J. Linn Allen,Chicago Tribune

Congress is working on legislation to close loopholes in federal law that leave consumers who refinance without the same protections they get with purchase mortgages.

"Quite simply, these consumers are not protected by disclosures that are required in first-time [and succeeding mortgage] loans," said Rep. Esteban Torres, D-Calif., chairman of the House Consumer Affairs and Coinage Subcommittee, whose office is drafting legislation to correct the problem.

The key issue is the truth-in-lending law, which requires lenders to give borrowers purchasing a home "good-faith estimates" of loan rates and fees within three days of a loan application.

For refinancings, however, the law allows lenders to wait until just before the loan is closed to disclose the terms.

"Many people are confronted by hidden costs and higher rates when they go to sign the final papers," Mr. Torres said.

"There have been abuses, and lenders have been using the loophole."

Mr. Torres' proposals will also seek a change in the Real Estate Settlement Procedures Act (RESPA), which exempts refinancings from anti-kickback provisions of the federal law.

Those regulations prevent lenders from paying real estate agents, attorneys or others to steer mortgage business their way.

Purchase mortgages are covered, but refinancings aren't.

David Williamson, head of RESPA enforcement for the Department of Housing and Urban Development, said that particular loophole has generated a few complaints recently, but not many.

Brian Chappelle, vice president for government affairs for the Mortgage Bankers Association of America, said his group would probably support Mr. Torres' proposals, but he expressed doubt they are needed.

Lenders, he said, give out "good-faith estimates" as a matter of course, since it is required for purchase mortgages.

Making an exception for refinancings would just create administrative problems, he said.

"This is kind of a red herring," he said. "Mostly people just give it out as a rule of thumb."

He also noted that refinancers have a right to back out of a loan within three days after a closing, a right they don't have with purchase mortgages.

The bankers group, he said, would like to see that law amended so the "right of recision" could be exercised only if a lender didn't meet the agreed-upon loan terms.

Now, he argued, consumers have a blanket right to back out of a loan for any reason, including to shop for a better rate, thus costing lenders time and money.

Mr. Torres said his package could be in the hearings stage this spring and be ready in some form for a vote this summer.

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