Legislation Aims at Helping Borrowers : Would Limit Mortgage Lenders’ Ability to Raise Interest Once Commitment Made
State and federal lawmakers are considering five proposals that consumer advocates say would put mortgage shoppers on more even footing with lenders.
In Washington, Rep. Dean A. Gallo (R-N.J.) is expected to introduce a proposal later this week that would make it tougher for lenders to back out of an agreement to fund a low-interest loan after interest rates suddenly rise.
The measure was spurred by widespread complaints that some financial institutions reneged on earlier rate commitments when mortgage rates surged in April. Similar legislation is being drafted by Sen. William Proxmire (D-Wis.).
On the state level, two bills authored by Sen. Leroy Greene (D-Sacramento) have been approved by the Senate and sent to the Assembly.
Advertising Information
One would require lenders to include detailed information in loan advertisements, and the other is designed to let borrowers know whether the rate they are quoted can change before escrow closes.
A third Greene-authored measure would force lenders to give consumers the original appraisal on a property after they’ve paid for it, making it easier and cheaper for borrowers to shop for the best rates. The bill, which is opposed by powerful banking interests, was slated for a Senate vote late last week.
The proposed federal legislation comes as thousands of consumers claim that lenders are trying to back out of their loan commitments because interest rates have risen sharply.
Many of these borrowers applied for loans in March and early April, when fixed rates were as low as 8 1/2%. Now, some lenders will fund those loans only if the borrower agrees to accept rates as high as 11% because the 30- or 60-day promise, or “commitment,” to the lower rate has expired.
Consumers Angered
Some angry consumers claim that lenders intentionally delayed processing applications so the commitments would expire and higher rates could be charged.
Lenders deny such allegations, and say the slowdown was caused by a flood of borrowers trying to take advantage of the lowest rates of the decade.
A few bankers say consumers themselves are to blame because they took too long to submit documents needed to process their applications or because borrowers didn’t realize that the rates they were originally quoted could change.
Currently, consumers who simply refuse to accept the higher rates may lose several hundred dollars they’ve already paid for appraisals, credit checks, title searches and other documentation. If they try to change lenders, they also risk losing their “dream home” because escrow might not close on time.
Commitment Honored
If Gallo’s proposal becomes law, lenders who don’t “lock in” their rates would clearly have to say so in writing. But if the lender locks in the rate, the commitment must be honored, regardless of how long it takes for the loan to be processed--unless the lender can show that the consumer caused the delay.
Importantly, the legislation would also allow borrowers to back out of a deal within three days after they receive the documents in which the lender spells out the terms of the loan. A borrower who cancels the agreement would only have to pay a “reasonable” fee--expected to be around $25--to cover the bank’s handling costs.
The Gallo bill, if adopted, would supersede state and local statutes. Lenders who didn’t comply with the requirements could be liable for monetary damages suffered by the applicants.
Representatives of Consumers Union, a nonprofit consumers group that helped draft the Gallo and Proxmire legislation, say influential lending trade groups may attack the bills as they work their way through Congress.
Deluge of Complaints
But they believe some type of borrower-oriented legislation will eventually pass, in part because elected officials have been deluged with thousands of complaints from frustrated borrowers across the nation.
“An awful lot of people feel like they’ve been burned by their lender, and they want something done about it,” says Michelle Meier, Consumers Union’s legislative counsel.
The proposed legislation “would vastly improve” the borrowing process, she adds, because “consumers would know exactly what they’re getting, and lenders would have a tough time reneging on their promises.”
Any measure that is eventually passed and signed into law probably wouldn’t go into effect until late next year or early 1989, Meier says, because the legislative process is slow and it would take several months for new loan-related forms to be printed.
Bills Not Retroactive
Although the proposed legislation would go a long way toward leveling the field on which borrowers and lenders play, it wouldn’t help the people who were whipsawed by the big rate increase two months ago because it isn’t retroactive.
Also, borrowers who feel they were mistreated by their lender would still have to pursue the matter through the courts, a costly and time-consuming task.
More importantly, the requirements of the legislation may sometimes work against consumers instead of for them, especially when interest rates are falling.
Lenders who commit to a rate will be less likely--or perhaps even forbidden by law--to alter their terms if mortgage rates plunge while the loan is being processed. In addition, the lenders who currently allow borrowers to have the lowest rate available during the entire escrow period may end such practices.
Scaring Off Lenders
An even larger segment of the lending community may simply refuse to offer locked-in rates at all, and instead determine the rate when the loan is ready to close.
“Consumers could suffer if the legislation is written in such a way that it scares lenders away from locking rates in,” says Peter Knight, a vice president for the National Council of Savings Institutions, a lenders trade group based in Washington.
When a rate isn’t locked in, Knight says, “there’s a little more uncertainty in the whole loan process, and the borrower will suffer if rates go up.”
Meier, however, says borrowers are already suffering. “A loan commitment isn’t any good if the lender has several ways to back out of it, and that’s the way it is today,” she says.
“I don’t expect lenders to receive this legislation with open arms, because they won’t want to give up the cushy position they’re in now.”
But if lenders don’t help clear up the confusion over rate commitments, state lawmakers may do it for them. Legislators in Connecticut and Maryland already have approved bills aimed at settling the commitment-rate controversy, and a few other states are considering similar measures.
Fraud Charges Filed
Some states are even taking lenders to court. Pennsylvania’s attorney general filed consumer-fraud charges against Lomas & Nettleton Co. earlier this month, alleging that the mortgage company lured borrowers by promising low-rate mortgages and then increased the rate before the loans were funded.
Among other charges, the state claims L & N misrepresented its mortgage rates to consumers and failed to honor loan commitments.
No bill directly concerning lock-in commitments has been introduced in the California Legislature, according to Krist Lane, a consultant to the state Senate Housing and Urban Affairs Committee. The three borrower-oriented bills authored by Sen. Greene face an uncertain fate.
