Bill Would Take ‘Ambushes’ Out of Refinancing

Homeowners refinancing their mortgages could be on the verge of getting the same consumer protections under federal law guaranteed to applicants for new loans.

The Senate has passed a bill plugging two gaping statutory loopholes--the failure of both the Truth-in-Lending Act and mortgage settlement anti-kickback laws to cover home refinancings. The loopholes, say critics, allow unscrupulous lenders and mortgage brokers to mislead borrowers into loans and closing costs far more expensive than they’d otherwise choose.

The new bill (S-2148), sponsored by Sen. William V. Roth Jr. (R-Del.), would require lenders nationwide to make identical disclosures on refinancings as they currently do with new mortgages. This should eliminate what Roth calls “settlement day ambushes” on refinancings--last-minute discoveries by consumers of extra fees and costs that were never disclosed at the time of loan application.

It would also authorize heavy federal penalties for under-the-table kickbacks or referral fees paid by lenders to brokers, lawyers or others in connection with refinancings. Such kickbacks are banned by federal law for new loan transactions but are fully legal on refinancings.

Roth said he first learned of the loopholes when he read about them last January in this column. The measure now goes to the House. Since the bill is not retroactive, consumers will not be covered until the House passes it and President Bush signs it into law. An estimated 3 million Americans are expected to refinance this year, according to mortgage industry analysts, more than double 1991’s total of 1.4 million refis.

The truth-in-lending loophole--still little-understood by the general public--works like this: Under federal law, lenders making new loans are required to provide detailed disclosures about the terms of the financing. No later than three business days after receiving a borrower’s application, they must provide what are called “good faith estimates” of such key loan costs as: the annual percentage rate (APR), the total cost of credit (including buyer’s points, mortgage insurance, and all other finance-related charges), plus the payment schedule for the years ahead.

Lenders who misstate or fail to provide these advance disclosures on new loans expose themselves to investigations by the Federal Trade Commission, prosecution, and stiff financial penalties.

For refinancings, however, lenders need only provide their disclosures “prior to consummation” of the loan transaction. As a practical matter, that can mean that as late as 10 minutes before final closing of a refi loan, a borrower can be handed settlement documents calling for charges twice as high as anticipated. Given the choice of refusing to pay the higher fees--blowing the entire transaction--or going along with the last-minute rip-off, many consumers choose the latter. And under federal law, they have no recourse.

A top executive of one of the country’s largest mortgage banking companies offered a graphic example of the loophole--one that he says he personally witnessed. A mortgage broker, he said, gave an oral estimate of $1,500 in loan fees to a refinancing applicant. The broker intentionally avoided providing written truth-in-lending estimates, the executive said, because he knew he didn’t have to, thanks to the federal legal loophole.

When the loan went to settlement, the borrower saw his actual loan fees in stark black and white. They were $2,800--nearly double the earlier, rough estimate.

“It happens every day, all over the country,” said the mortgage executive, who requested anonymity. “Sometimes it’s nickel-and-dime stuff, sometimes it’s thousands of bucks.”

Until the loopholes in federal law are closed, how do you protect yourself as a potential refinancer?

Since your major point of vulnerability is in loan-related fees, you should demand that your refi lender make a written “good faith estimate” of all such charges on your transaction. That means all loan origination, underwriting, processing, warehousing, settlement or other charges--whatever artful name the lender applies to them.

Tell the loan officer: Look, we both know about the truth-in-lending loopholes. And we both know Congress may plug them this session. If you want my loan business, I want you to treat this application just as you would a new loan. That means full truth-in-lending disclosures in my hands within three business days of this application.

Any lender or broker who balks at that request is inadvertently giving you some good consumer advice: Get up from the chair and walk out the door. Save your 1992 refinancing for a lender who doesn’t depend on loopholes--even if the law allows it.