New Rules: Lenders Must Disclose All Loan Fees

Home loan applicants nationwide should be the beneficiaries of a new Federal Reserve Board rule on upfront disclosures of fees charged by mortgage brokers.

Effective Sept. 30, all fees levied by loan brokers and paid directly by the borrower must be included as part of the mandatory truth-in-lending finance charge disclosure that consumers receive within three business days of applying for a home mortgage.

Before the new rule, there was no uniform federal guidance as to what fees brokers had to disclose upfront as part of the finance charge or annual percentage rate computations for truth-in-lending purposes.

That, according to federal officials, has allowed some brokers to offer financing packages with APRs that appear to be lower than they really are.

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Truth-in-Lending Act disclosures are intended to allow consumers to shop around and compare various lenders’ combinations of rates and fees. Under the law, borrowers are supposed to be able to weigh competing lenders’ full packages of terms--the base interest rate on the loan, the disclosed finance charges and the APR--and make intelligent choices.

But if all fees are not disclosed at the application stage, the borrower can easily be misled and end up choosing a mortgage company with a disclosed APR that is artificially lower than that of competitors.

Say, for example, that two competing mortgage firms quote you seemingly identical 8% fixed rates on a $100,000 30-year home loan.

The first company happens to be a local savings bank that lends directly to borrowers on a retail basis and holds its loans in its own portfolio. The second firm is a mortgage broker functioning as the retail loan origination office for a large bank in another state. The brokerage firm is not the actual lender. None of its own money is ever on the table.

Its compensation comes in the form of fees charged to you directly or paid by the lender after closing.

If the broker’s fees are not fully disclosed to you upfront, however, the true cost of its 8% quote may not be apparent to you.

On a $100,000 30-year loan, fees totaling 4% of the loan amount--or four points--can turn an 8% APR into an 8.435% APR. On shorter term loans, the effect of undisclosed fees on the effective rate you pay is even greater. Four points on a five-year $100,000 home equity loan takes the 8% quoted to you to an APR of 9.744%.

If an applicant receives no information about these fees in the initial truth-in-lending disclosures but instead learns about them for the first time at closing, it’s virtually impossible to shop intelligently.

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That’s the problem the Federal Reserve’s rule seeks to fix. It covers all mortgages closed nationwide on or after Sept. 30.

Borrowers who put in their applications in midsummer and are scheduled to close this month must receive full, accurate truth-in-lending disclosures of all fees from brokers, according to a Federal Reserve attorney, even though incomplete disclosures may have been made at the application stage.

Large mortgage lenders that work through local brokers have been faxing warnings about the importance of complying immediately with the revised federal rules.

One firm, Pennsylvania-based Advanta Mortgage Corp., instructed its network of brokers to include all of the following fees in the finance charge disclosures: points, origination fees, application, underwriting, loan commitment, flood monitoring, loan processing, tax service and document preparation fees.

An attorney whose firm represents national mortgage companies and banks, Philip H. Myers of Pittsburgh-based Reed Smith Shaw & McClay, welcomed the Fed’s move.

“This should improve the consumer’s ability to compare the true costs of credit in the marketplace,” he said. “It allows you to compare oranges against oranges, apples against apples.”

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The president of a large mortgage brokerage company, Patricia K. McGill of Money Marketing Inc. of Frederick, Md., said the “vast majority” of mortgage brokers across the country “have been fully disclosing their fees” as a matter of policy for some time and that the new Fed rule should not hinder their competitiveness in the marketplace.

McGill, a past president of the National Assn. of Mortgage Brokers, said that “any change that enables the consumer to shop more knowledgeably won’t hurt our industry a bit.”

The bottom line for you as a loan applicant:

Even when you’re shopping by phone, ask competing brokers and lenders for an estimate of the finance charges and APR that are likely to show up on the truth-in-lending disclosures you’ll get if you apply.

Then, when you sign with a particular lender, make sure you get what you were quoted.

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Distributed by the Washington Post Writers Group.