U.S. Wants Help in Easing Loan Pains

WASHINGTON — The federal government wants your help in simplifying what for many home buyers and refinancers is the least pleasant part of obtaining a home mortgage: the eye-blurring paper blizzard of disclosures and forms you get during the loan application and settlement process.

The Federal Reserve Board and the Department of Housing and Urban Development are seeking ideas from consumers until June 30 to help them come up with more effective disclosures on truth-in-lending and home real estate settlement costs.

The agencies plan to ask Congress to make the legislative changes necessary to streamline the process nationwide as soon as possible.

Tops on the list of questions the government would like you to answer:

* What does a consumer really need to know about a mortgage quote for intelligent comparison shopping?

* When does a consumer need to know it?

Under the current system, loan applicants often get little more than a rate quote until three business days after signing for the mortgage. That’s when the lender is required by federal law to provide a series of detailed truth-in-lending disclosures on the terms of the loan, including the finance charge, annual percentage rate, total payments and others.

Three business days after the application, the lender is also required by federal law to send the applicant itemized “good-faith estimates” of the settlement costs the buyer can expect to pay, such as title insurance, loan brokerage fees, appraisal, credit report and transfer taxes.

The problem with these disclosures is that they typically come too late in the game to be useful in comparing one lender’s deal against another’s.

For example, say one lender quotes 7 3/4% and two points for a new mortgage. (A point equals 1% of the loan amount.) The next best quote the buyer gets, after vigorous shopping, is 8% and two points. So the buyer goes to the first lender’s office and fills out an application.

What the buyer doesn’t know at this stage is whether the 7 3/4% lender actually offers the better deal. The buyer has no idea whether the lender routinely lards on so-called “junk fees” and other charges that erase the one-quarter percent rate advantage over the next lowest bidder.

Many borrowers do not discover these fees until they get their mortgage settlement documents, when it’s too late in the process to bail out. A new statistical study of 500 recent mortgage borrowers conducted by the polling firm Yankelovich Partners found that nearly one of three borrowers says they encountered unexpected fees in obtaining their mortgages. The surprise charges ranged from loan brokerage fees to document preparation and title expenses that they had not known about.

The same study, sponsored by the Mortgage Bankers Assn. of America, also found that 40% of all borrowers say they were “confused” by the mortgage loan process, especially the paperwork.

Among the reform alternatives the Federal Reserve Board and HUD may consider are the following two:

First is a capsulized truth-in-lending disclosure that would be available as part of any mortgage quotation before the application is completed. This would replace the current post-application disclosures.

The new disclosure would boil down the quotation to this: the interest rate, monthly payment, all estimated financing-related charges and an annual percentage rate that rolls all charges together and factors them into an effective rate.

Armed with this critical information, borrowers would be able to compare lender against lender, loan quote against loan quote at the most important stage in the deal, before an application is made. The lender would be expected to provide accurate estimates of all loan-related charges or to disclose any significant changes before final settlement.

A second possibility is shifting to a radically different system whereby lenders would contract and pay for all loan settlement services and roll them into a pre-application quote for the complete loan package.

Rather than a lender estimating the expected cost of the appraisal at about $300 and title insurance at $600, for example, the lender would obtain the services at bulk-rate costs from regular contractors.

Because lenders would know that their bottom-line quote would be compared with competitors’ quotes, they would be motivated to obtain the lowest possible costs for services that borrowers now obtain on their own.

Which of these two alternatives do you prefer? Or do you have other ideas to make the disclosures more effective? Write to the Federal Reserve before June 30, Attention: Secretary, Board of Governors, Federal Reserve System, Docket No. R-0954, 20th Street and Constitution Avenue NW, Washington, D.C. 20551.

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Distributed by the Washington Post Writers Group.