New Rules for Lenders

In the wake of all of the troublesome loans made over the past 5-6 years, the government has really begun to hogtie the lending industry — all in the name of protecting the consumer from being taken advantage of by unscrupulous practitioners.

The latest of a rapidly growing list of new regulations on the lending industry is the requirement for the lenders to re-do their “truth in lending” disclosure whenever any thing happens that would change the annual percentage rate (APR) that their clients would be charged on a loan by 1/8th of a percent (either up or down).  The APR is determined not by just the mortgage rate but the combination of the rate and all of the fees that it will take to get this rate.

This may not sound too onerous at first blush but the more you think about it, the more complicated it gets.

Let’s just say that the borrower meets with the lender and they lock a loan of 6.5% with 1 point (a point is 1% or the loan amount).  The lender produces a “truth in lending” statement that discloses the annual percentage rate.  The borrower and the lender go through the transaction (either a re-fi or a home purchase) and when they get to the end the borrower decides that he would rather have a lower mortgage rate and pay for it with another point.  This will probably change the APR by more than an 1/8 of a percentage point and the lender will have to produce a new “truth in lending” statement which carries with it a 3 day right of rescission (the borrower can back out of the loan within 3 days).  Well let’s remember, at least in the case of a purchase, there is a seller on the other side of this transaction, waiting for the contractual closing date.  Add to that the time it takes a lending institution to re-draw documents after being told that their customer (the borrower) has decided to change his rate.  Well, you can begin to see the picture — right?

Now, I am not saying that this is a bad decision on the part of our regulatory agencies — it is just that either escrows are going to take a lot longer or borrowers are going to have to spend a lot more time doing their homework with regard to interest rates and loan scenarios before they make a decision.

As always, this is just our take on the situation.  Read more about it here.