Just when you thought you had signed every document under the sun- and your life away….there are more!Beginning July 30, 2009 the mortgage applicant will have more forms to read and sign for the lender. The Housing and Economic Recovery Act is introducing new standards of fees and disclosures for lenders and mortgage brokers/bankers. Here a few of the highlights:

 

• All loan disclosures must be produced within 3 business days of receiving the application back from the client- always have been
• All disclosures must be updated and sent to the client again within 7 days prior to the closing- more paperwork and extra delays
• Saturdays now count as a business day- cant we rest ever!
• No fees may be paid until the Truth and Lending Disclosure is produced to the client- ok, so that will force the bank to send the form out on time!

• The lender may only take a credit report fee upfront, which is about $12. –why bother charging at all
• The truth-in- lending form must be changed every time the interest rate changes, even an 1/8 of a point- because people really read this form

I need to go on to ask, what is the truth-in-lending form? Do any of the politician really know? Can any loan officer really explain this form to their client?

This form, known as the “TIL”, is designed to show the borrower what the actual cost of their mortgage is by lumping all the closing costs in with the interest paid and amortizing (spreading) it over the life of the loan. A new interest rate is calculated, referred to as the Annual Percentage Rate (APR). The APR will always be higher than the actual interest rate due to the calculation and formula used. The issue is that it only includes some of the closing costs and an estimate of pre-paid items such as interest. Thus, it is off right out of the gate.

A few interesting things it does point out would be the total amount of interest you pay over the life of the loan. This is also very scary, because it is about 3X the initial loan amount!  The TIL will also show you what the late payment will be if you send in your check late. This is important to know and verify because it is capped in many states. Another tidbit would be if there is a pre payment penalty if you win lotto and pay off your loan early. This was a bone of contention with many sub-prime loans that could not be paid off without a huge penalty. So, I would also look for that information too.

Here is my favorite line:  If you pay off the loan early, you will not be entitle to a refund of the interest you had already paid out for the time you used it. Obviously!

When most people look at the form, they think the APR is the interest rate and scares them into calling their loan officer. The loan officer’s typical response is “don’t worry about that form; it is stupid!” I call it silly and would be even kinder and call it limited and confusing. In fact, it is the most confusing form in the loan package to all those involved. Perhaps, they need to actually revamp the form or do away with it all together. But, for some reason, the committee decided to make this the most required form in the loan package. I dare anyone to call their governor and ask them to explain the Truth-in-Lending  form to them!

Dale Siegel