Money Talks: Reforming the Mortgage Process

One of the biggest problems with mortgage shopping is that darned old APR. The annual percentage rate does not include all the costs of mortgage shopping. And sometimes those costs magically float higher as closing day rolls around.

Solution? Mortgage reform. The Department of Housing and Urban development is proposing changing regulations to make the mortgage process less confusing, and at least one congressman has proposed a bill that would do even more to help consumers.

Here's the news on mortgage reform:

Gilbert Guss distrusts mortgage lenders. The federal employee from Rockville, Md., says he has had a few home loans, and he draws upon his experience when he gives advice to mortgage-hunting friends and family.

He tells people to watch out for junk fees and to scrutinize loan paperwork.

"I know I'm going to get ripped," Guss says, "but I'll go down fighting."

Lots of homeowners share Guss's fear that mortgage companies will take advantage of them, despite consumer protection laws. Now there's a move afoot to change the most prominent of these laws, the federal Real Estate Settlement Procedures Act, or RESPA. Proponents say the goal is to make the mortgage process less confusing and to reduce costs and paperwork.

The Department of Housing and Urban Development says it will propose new regulatory guidelines this summer or fall. To influence HUD, a Congressman has introduced a RESPA reform bill. The Mortgage Bankers Association is pushing its own suggestions.

RESPA requires lenders to itemize costs in six categories. First, the lender has to provide a good faith estimate of closing costs within three days of the loan application. Second, the lender must provide a final settlement statement the day before closing. Neither document is especially easy to understand if you're not a mortgage professional.

RESPA requires that borrowers receive several disclosures. The good faith estimate and final settlement statement are disclosures. Another disclosure tells whether the lender or another company will collect payments. Another details the lender's policies regarding escrow accounts, which are set up to ensure that insurance and taxes are paid on time.

Finally, according to HUD, RESPA bars a lender from, say, paying $20 for a credit report and charging the borrower $50 for it. The mortgage industry has challenged this policy against markups and one federal appeals court has said such markups are legal under RESPA, regardless of what HUD says.

All of these -- the formats of the good faith estimate and final settlement statement, the content of other required disclosures and HUD's ban on price markups -- could change this year.

HUD officials won't say what changes they're considering. HUD's power is limited because it can't amend RESPA. Only Congress can do that. HUD can, however, change its policies that enforce RESPA.

With HUD promising to take action, industry groups and members of Congress have chimed in with their versions of mortgage reform. The Mortgage Bankers Association wants lenders to be able to come up with a "guaranteed closing cost." This means that you would apply for a loan and the lender would offer an interest rate and a lump-sum closing cost that would include everything from the appraisal fee to title insurance.

The MBA says such a policy would lower lenders' costs and would make it easier for borrowers to shop for the best rate and terms. It also would allow bankers, title companies, appraisers and others to engage in behind-the-scenes price markups and kickbacks as they bundle services. No matter, says the MBA: Consumers would win because lenders would be forced to compete on bottom-line price.

Consumers would have fewer choices under the MBA proposal. Right now you can choose your own title insurance company and settlement company if you want to go through the trouble. You probably wouldn't have those choices under the MBA proposal. You would be presented with a bundle of services for a price, take it or leave it.

"The whole deal with me is I like a little freedom of choice on these particular loans," Guss says. "I'd sort of like to know what these settlement costs are for and what each would cost me."

The MBA's approach is a non-starter to him. The lobbying group of title insurance companies opposes the MBA's proposal, too, because consumers would have fewer options in choosing title insurers.

Taking a different tack, U.S. Rep. John LaFalce has introduced a bill called the Mortgage Loan Consumer Protection Act. It would simplify the good faith estimate and final settlement statement. The documents would break costs down into three categories instead of the current six, while still allowing borrowers to choose title insurers and settlement providers.

LaFalce's bill would require that borrowers receive the final settlement statement two days before closing instead of the current one day. It would clearly ban fee markups, torpedoing the industry's legal challenges to HUD's ban on markups.

The bill would plug one loophole that drives some homeowners nuts. Right now, if you refinance the mortgage, the loan servicer can take its own sweet time refunding the money in the escrow account. Federal law sets no deadline on the return of escrow money, so the loan servicer can let it sit there for months before refunding it to the borrower. The loan servicer gets to keep the interest.

Under LaFalce's bill, when you're refinancing your mortgage, the balance in the old escrow account would have to be refunded on the day of closing. That's if you give the old lender seven days' notice that you're refinancing the loan. If you give less than seven days' notice, the old lender has to refund your money within three weeks.

LaFalce, a Democrat from New York, concedes that his bill doesn't have much chance of passing the Republican-controlled House.

The bill, he says, "is intended to establish a pro-consumer benchmark with regard to any action HUD or Congress might take with regard to mortgage reform."

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