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Lenders "Confused" by Honest Disclosure

Rules to make loan disclosures accurate could be delayed
Home loan rules slated for a long-overdue overhaul this January may get delayed yet again thanks to heavy lobbying by lenders, who claim they're "confused" by regulatory demands for honest disclosure.

At issue are the so-called "good faith estimates" you get when you secure a home loan, which spell out the estimated costs of closing including the fees you pay for home appraisals, title insurance, loan fees, notaries, etc. There's just one problem with these estimates--they're often bad.

Consumers have complained for years that some lenders would provide low estimates of closing costs when they were selling the loan, which would encourage the consumer to secure the loan through that lender. More than a month later, when the loan is about to close, they'd find out that the costs had skyrocketed by hundreds, or even thousands of dollars from the number in the estimate.

At that point, consumers were left with a Hobsons choice: Accept the inflated fees or walk away from the loan, which also might mean they'd have to walk away from a home purchase. The government rules that govern good faith estimates, called RESPA, had no penalty for lenders who engaged in these bait-and-switch tactics.

After debating the problem for a half-dozen years, the Department of Housing and Urban Development came out with new rules that would penalize lenders for significant inaccuracies in these estimates about a year ago. In short, HUD said that if you understate these fees by more than 10%, consumers can sue you for the overage. These rules are slated to go into effect on January 1.

Moreover, HUD demanded that everyone start disclosing their fees in the same manner, so there would be no consumer confusion. This has flummoxed the lenders, who are apparently so accustomed to obfuscation that they don't know how to cope.

In a "strongly written" (their words) letter to Housing and Urban Development Secretary Shaun Donovan, the Mortgage Bankers Association said "confusion" over implementation of the law could lead to a mortgage market "train wreck." Lenders are not ready, they told Donovan in the letter, which was also signed by the American Bankers Association, the American Escrow Association, the American Financial Services Association and the Consumer Mortgage Coalition.

It's worth noting that virtually any new law can spur questions. As a result, Donovan has been all over the country explaining the rules, passed last May, and HUD has supplemented these explanations with 42-pages of answers to "frequently asked questions" on its web site.

"If lenders are unprepared it's because they've spent every last second of the past year fighting the law, rather than figuring out how to implement it," one industry insider groused. "HUD has been working on these rules for the past seven years. They're not exactly a surprise."

San Francisco-based Wells Fargo Bank agreed. After hearing about the trade groups delay request, Wells Fargo sent Donovan a letter asking him to ignore the trade groups.

"We have already programed the mandated...changes into 40 computer systems and have no choice but to proceed," the co-presidents of Wells Fargo Home Mortgage wrote. They went on to argue that if all lenders were not forced to adhere to the new rules, lenders who play it fair would be at a competitive disadvantage to those who don't.

Jeff Lazerson, president of, said the only companies that would benefit from a delay are the ones that cheat.

"This forces all lenders to stick to our quotes," said Lazerson. "You have to eliminate the opportunity to bait and switch borrowers."

HUD, meanwhile, responded to the Mortgage Bankers today by saying that they have every intention of implementing the rules in January, as scheduled.

So what's the problem? Apparently the banking lobby has gotten to somebody on the House Financial Services Committee. National Mortgage News, a respected industry publication, was reporting this morning that legislation would be introduced today to delay the law. No word on the legislation yet, but stay tuned.

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