The new Mortgage Disclosure Improvement Act (MDIA) promulgated by the federal government is not much of a change for lenders who were ethical and disclosed costs initially; but for those unscrupulous lenders who performed “bait and switch” during the home buying heyday, lamentations are rampant.
“The purpose of the new Mortgage Disclosure Improvement Act is to insure buyers are fully aware of closing costs and interest rates which they will be charged on their mortgage loan,” said Courtney Walker, Vice President of Nova Home Loans. “They don’t get to the closing table and are surprised by the numbers”, Walker continued.
Within three days of applying for a loan, a full cost disclosure must be given to the applicant. The cost disclosure must be given before any fees are collected, with the exception of any fee charged for pulling the consumer’s credit report, according to the amendment to Regulation Z, Truth in Lending. Closing cannot take place for seven days unless specifically requested for an emergency.
In the heyday, reputable lenders provided cost estimate sheets for their clients with the closing costs and loan costs spelled out, including the interest rate. Good Realtors helped clients by providing clients with names of honest lenders and kept an eye on closing costs, making sure there were no pre payment penalties or other charges unless the client understood the terms of the loan.
This legislation comes as a result of the numbers of people who said they did not understand the terms of their loan and the loan costs, such as the option arm loans or the first 80% fixed rate loan with an adjustable rate for the second loan.
“The point of the MDIA is that whenever closing costs or interest rates change, the APR reflects these changes in the closing costs and interest rate.” Walker gave the following example: A person is offered a fixed rate and the APR is stated, and then offered a 2% rate with a $10,000 up front charge. How does that person know which loan to choose? “How are they going to compare an apple with an orange? The APR will help do that”, Walker said.
Under the new legislation, if the APR moves 1/8 of a point either up or down, the lender must redisclose to the client “to insure that the buyer is fully aware”. The borrower must be given a reasonable amount of time to review the new numbers. “The buyer must receive, review and acknowledge in writing the new disclosure” and if the new numbers are not approved, then the buyer must change courses.
Escrow fees are included in the APR so it is important that the Title Company named in the buyer contract documents is not changed. Title companies in the Phoenix area charge different rates than the title companies here in Tucson. For people purchasing foreclosure or short sale properties, any costs the buyer pays, such as allowable seller closing costs, must be included in the APR.
If the market moves tremendously, and interest rates go down, redisclosure is mandated, even if to the borrower’s advantage. Lenders cannot collect upfront fees from borrowers at the time of application. These include appraisal fees and lock in fees.
Lock in fees are relatively new and are similar to earnest money, Walker said. The purpose of up front lock in fees is because investors (of the loans which the borrower is applying) are beginning to penalize lenders for not delivering on loans for which borrowers apply. This is often due to borrowers shopping rates. “Time, money, and effort is put into getting a loan approved” Walker said, and the lock in fee shows good faith on the part of the borrower. The fee is remitted at the close of escrow as a credit on the closing statement.
The new requirements do not add time to the loan process, Walker said. “Nova underwrites locally, draws the docs locally, and funds from its own money,” she added. “Even with FHA and VA loans, we have basically a 30 day turn around time”.
Some lenders are recommending a 45 day closing time, so that if a contract is written August 1, closing should be stated September 15. A Realtor who works closely with the lender is your best advisor, knowing the turn around times of lenders is even more important, and it underscores the need to use local lenders.
Nova Home Loans http://www.lancedickson.com
Federal Reserve Board Press Release
Federal Register: http://edocket.access.gpo.gov/2009/pdf/E9-11567.pdf