Vail Valley: More ‘consumer protection’ may raise costs
Like many Vail Valley residents and other Americans, I have mixed feelings about where our country is headed politically. It seems that the Obama Administration is out to protect us from ourselves and as history has shown, that seldom works very well in the long run.
For many years consumers have in theory been protected when shopping for a mortgage loan by the Truth-in-lending act, which in a very bizarre way calculates the cost of a mortgage over the life of the loan. I have always nicknamed it the “confusion in lending act.” At the time of application and at closing you get a truth-in-lending statement showing your effective annual percentage rate, known as your APR.
The short version is that to calculate your APR the lender takes certain costs associated with closing the loan and averages these across the life of the loan and equates paying these costs as if the borrower were paying a higher interest rate with no costs.
In the true spirit of taking what was already broken and smashing it to bits with the plan of handing it back to the average consumer to put back together, Congress, with the strong encouragement of the Obama Administration, ha amended the Truth-in-lending act to make it even worse.
Congress was concerned that consumers were not getting an accurate disclosure in many cases of the APR they would be charged. Remember, the APR is different from the note rate because the APR includes certain (but not all) costs charged to the consumer associated with closing the loan. Often times the APR would change from the time of application to the closing date. This is due to several possible reasons dealing with rate changes or unforeseen costs associated with the loan.
Under the new rules the borrower must be mailed a Truth-in-lending statement after he applies. The lender must assume it will take three business days to arrive and the consumer must have an extra three business days to review it. Until the six business days have passed the lender cannot order an appraisal. Factor in weekends and holidays and the appraisal will not usually be ordered until 10 days after application.
Seven days prior to your closing a finalized version of the truth in lending statement will be sent out and you cannot close your loan until the eighth day.
If anything should change that impacts the APR calculation by more than 1/8th of a percent, the consumer must be given a new disclosure form, and the waiting game starts again.
This means that, in essence, if you are getting a loan you had best allow 45 to 60 days to complete the process rather than the customary 30 days. To lock your rate for 45-60 days will likely add to your interest rate.
It gets even better. If you were fortunate enough to renegotiate to a lower rate the day before your purchase closed you would have to stop everything and wait six business days to reconsider your good fortune and be sure you wanted that lower rate.
If something came up that required an additional $25 courier fee as part of the transaction you also might have to wait six business days to be sure you still want to go through with the loan closing. If your lender mistakenly input the loan closing fee was $225 and it comes in at $250 your closing stops in its tracks and you wait six business days to reconsider if you still want the loan or not.
Of course, if your rate lock expires during the days you are required to think about your APR you might just lose the loan you planned to get.
If you are out of contract and the fact that the seller may just waltz off with your earnest money is unfortunately your problem, just remember that its all being done in the name of protecting consumers.
Sellers, borrowers and Realtors have to be acutely aware of these new rules and grit their teeth and be flexible. I would highly recommend that a Truth-in-lending compliance clause be added to every purchase contract involving financing in which the buyer and seller agree that any delays caused by Truth-in-lending compliance issues not be a reason for backing out of the deal.
This whole thing could make a man look at the Bush years as the good old days.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and can be reached at 970-748-0342. He welcomes mortgage related inquiries from local readers.