Among the more interesting of the Federal Reserve proposals for amending the Truth in Lending Act (TILA) is one to expand the disclosures required at application. The purpose is to encourage mortgage borrowers to shop before they commit themselves.
The major new disclosure is one called "Key Questions to Ask About Your Mortgage." The heading atop the list of key questions states, "The only way to make sure you get the best possible loan terms is to talk to several lenders: Shop, Compare, Negotiate."
This is a great idea, except that the seven questions posed by the Fed will be answered in the same way by every lender. I will illustrate with answers to the first three questions that would work for every lender.
Fed: "Can my interest rate increase?"
My answer: It can if you select an adjustable-rate mortgage (ARM).
Fed: "Can my monthly payment increase?"
My answer: It can if you select an ARM, or a fixed-rate mortgage (FRM) with an interest-only option.
Fed: "Will my monthly payments reduce my loan balance?"
My answer: It will unless you select a fixed-rate mortgage with an interest-only option, or an ARM with an interest-only option or a negative-amortization option, and you take advantage of the option.
I could do the same with the remaining four questions. The problem is that the questions apply to mortgage types or options rather than lender operating policies. Since with minor qualifications all lenders offer the same types of mortgages and options, they will all answer the seven questions in the same way. The answers would be useless to borrowers trying to select among different lenders.
To help borrowers select from among different lenders, the questions must apply to lender operating policies, not to their mortgages. There are important differences in operating policies that borrowers currently have no way of knowing. The following are seven questions that I would want the answers to if I were selecting a lender.
Q: Do you allow your loan officers (LOs) to charge "overages"?
Comment: I would not want to deal with an LO who has a financial incentive to overcharge me. An overage is a price higher than the price the lender shows on its price sheets, which show the prices the lender will accept. Overages are usually shared with LOs, encouraging them to charge what the traffic will bear. Some lenders do not allow overages, and this disclosure at the point of application will give them the edge they deserve.
Q: Do you have a financial interest in, or a financial arrangement with, any of the third parties providing services to your borrowers?
Comment: I would not want to deal with a firm that referred me to title agents or other service providers in which they had a financial interest. Overcharges on third-party services are chronic, and lender deals with service providers are a major reason. The RESPA restrictions on payment of referral fees have had no impact, but a disclosure requirement would. Note to home purchasers: This is also a good question to ask your Realtor. …CONTINUED
Q: Are any of your mortgages (other than HELOCs) simple interest, or convertible into simple interest?
Comment: I would not knowingly take a simple-interest mortgage because it accrues interest daily, eliminating the benefit of having a payment grace period. It has never been a required disclosure, and some borrowers have been surprised to find themselves with one. In some cases, borrowers have been converted to simple interest after their loan was sold because their note could be interpreted as permitting it.
Q: What must a borrower do before you will lock the price of their loan, and will you provide a written lock confirmation?
Comment: I would not deal with a lender that did not have well-defined rules regarding exactly when I was able to lock the price, with confirmation of the lock in writing. Ambiguity that in effect allows the lender to lock when it wants to lock can seriously disadvantage borrowers who have no place else to go.
Q: What fees must a borrower pay to lock, and under what circumstances are they refundable?
Comment: This is another essential part of a lender’s lock policy.
Q: When you lock the price of a mortgage, do you also lock the total of your fixed-dollar lender fees?
Comment: I would not deal with a lender that did not include all of its charges in the lock. Most lenders lock only the rate and points, leaving fixed-dollar fees outside the lock. This practice makes the borrower vulnerable to fee escalation as the loan goes to closing. The Fed recognizes the problem in its reform proposals, but its remedy is to require that the lender raising its fees issue another Truth in Lending statement. All that does is give borrowers advance notice that they will be fleeced at closing.
Q: What proportion of your loan officers are certified financial planners?
Comment: Most replies in the short run will be zero, but this puts the borrower on notice that the LO really isn’t qualified to offer financial advice. In the long run, it may stimulate lenders to upgrade the quality of LOs.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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