Help may be on way for home loan misery Proposals would ease paperwork blizzard fTC

Nation's Housing

July 12, 1998|By Kenneth R. Harney

IF YOU'VE bought a house or shopped for a mortgage in the past few years, you know the problem: You get smothered in federally mandated paper -- good-faith estimates, cost-of-credit disclosures, loan-servicing notices and tough-to-understand settlement cost itemizations.

And if you're like many consumers, you don't really read all that fine print. Worse yet, some of the most important disclosures -- such as truth-in-lending and closing-cost projections -- either get to you too late to be useful, or are subject to major bottom-line revisions before your home loan actually closes. But does the home financing process have to be so clunky? Later this month, two federal agencies plan to present a long-awaited report to Congress explaining why it doesn't.

After studying the mortgage and real estate disclosure system for nearly two years, the Federal Reserve Board and the Department of Housing and Urban Development (HUD) are expected to outline a series of optional approaches that Congress should consider to streamline the process.

Consumers will have a lot riding on the recommendations, and on how and when Congress puts them into action. Though the specific proposals are under tight wraps, you can expect initiatives in at least three key areas, according to agency sources:

* Better help with loan comparison-shopping. One of the worst features of current truth-in-lending disclosures is that they often get to borrowers too late. Lenders have to send them out within three business days after an application. The disclosures include the interest rate on the mortgage note, the amount of loan-related fees or "points," the total finance charge over the term of the loan and an "annual percentage rate" (APR) that expresses the effective cost of credit per year with all fees rolled into the interest rate.

By the time the borrower gets these numbers, he or she often is firmly on the hook. The new recommendations to Congress are expected to outline options for making some form of truth-in-lending disclosure available earlier -- at the shopping stage, before the borrower feels committed. This should allow truth-in-lending to function as it was intended to at its inception .. 30 years ago -- a tool for a consumer to compare lender-to-lender, loan quote to loan quote, and then sign up for the most favorable.

* Simplified and more reliable closing-cost estimates. Homebuyers currently receive "good-faith estimates" about the anticipated costs of their real estate settlement. But sometimes those estimates turn out to be way off base by the time the transaction gets to final closing. New, previously unidentified fees and expenses pop up on the settlement sheet. Borrowers are then faced with the decision to blow up the whole deal -- something new homebuyers in particular are loath to do -- or to hold their nose and pay the surprise charges.

Under current law, even if borrowers complain about discrepancies between "good-faith" closing cost estimates and actual closing fees, the federal agency with regulatory authority -- HUD -- is powerless. It has no enforcement authority in this area -- a curious loophole in the real estate settlement procedures law.

Among the options to improve estimates that the report is expected to outline is one that's radical: Lenders and other settlement-service providers would be allowed to offer "bundled" quotes for the entire mortgage and settlement transaction. The bundled quotes could include the basic costs of the loan -- the rate, mortgage broker fees, the total finance charge -- plus a guaranteed, lump-sum, bottom-line charge for everything else, including appraisals, title insurance, credit checks, escrow, legal and closing fees. The lender or other service provider making the quote would be able to contract with -- and pay -- vendors for all these functions, and would have an incentive to keep costs as low as possible to attract applicants.

A second alternative would be to require lenders providing traditional, "unbundled" good-faith estimates of settlement-related fees and charges to virtually guarantee that the total won't be higher at closing.

* New protections against "predatory" lending abuses. The report is certain to offer options for Congress to crack down on unscrupulous lenders who target unsophisticated borrowers for high-cost home equity financing.

Alternatives include creating federal statutory "unfair and deceptive practices" standards banning abuses such as "flipping" of loans, where hapless homeowners are induced to serial refinancings for larger and larger loans with progressively higher fees and rates. Each refinancing pays off the prior loan, which the borrower couldn't afford. The end result of the series of flips is often foreclosure.

Outlook for the streamlining proposals: Congressional hearings begin July 22, but there's no real chance for reform legislation until after the fall elections.

Pub Date: 7/12/98

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