If you're applying for a loan to purchase a primary or secondary home -- or planning to refinance -- be mindful of a little-publicized new set of federal consumer-protection rules that take effect July 30.
Among other key changes, the new Federal Reserve guidelines require lenders to provide initial disclosures of your mortgage costs within three business days of a loan application. If you don't get them, you can pull the plug.
The rule also prohibits lenders from collecting any fees -- except a reasonable charge for checking your credit -- until you've been given the loan-cost disclosures. This means no more out-of-pocket upfront application charges until you've received the truth-in-lending disclosures and an annual percentage rate calculation of those costs.
Many mortgage brokers and lenders traditionally have collected fees covering appraisal, credit and various other charges at the time of application, so this will be a significant change in procedure.
The rule also prohibits quickie closings on loans by requiring a seven-day waiting period after applicants are handed their early disclosures or the disclosures are mailed. Final truth-in-lending disclosures are due three business days before closing.
In addition, the new federal rules require lenders to deliver a copy of the real-estate appraisal to consumers three business days before the scheduled closing.
In the past, even though federal regulations guaranteed that consumers could request and obtain a copy of the appraisal, lenders and home buyers frequently ignored that right.
Now the timing of the loan closing itself will depend on a home buyer's receipt of the appraisal in advance.
Another significant change under the new rules: If the annual percentage rate on the early truth-in-lending disclosure increases by more than one-eighth of a percentage point (0.125), the lender will be required to "redisclose" -- i.e., provide a corrected version and allow the buyer an additional seven business days to consider the transaction.
What might cause the percentage rate to increase after the initial disclosure?
Potentially, many things: Say you left your initial rate on the loan to float with the market, but rates increase. You'll need to get an amended truth-in-lending disclosure. Or say the lender got inaccurate estimates of costs from third-party participants in the transaction, such as the settlement or escrow company. Or say that unexpected eleventh-hour junk fees materialize.
All these events -- which have been frequent sources of consumer complaints this decade -- could force the lender to redisclose loan costs and set back timing for the settlement.
What are some of the likely repercussions of the Fed's new mandates?
No. 1, the traditional approach of aiming in advance for a certain settlement-date target for home loan transactions almost certainly will be affected. Actual closing dates will be more closely tied to lenders' and settlement agents' accurate estimates and their ability to deliver disclosures and appraisals by the required dates. For example, if appraisers are backlogged and can't produce valuation reports quickly enough, settlements will have to be postponed. Most lenders are now suggesting writing the purchase contract with the closing date set out 45 days.
Second, the purposes of the rules are to afford consumers better access to, and more time to consider, key elements of what are major financial transactions for most people. The intent is to have fewer instances of last-minute closing-date surprises on fees, where buyers are slammed with hundreds of dollars of charges they had never expected.