Last month, the Consumer Financial Protection Bureau called out the six most common deceptions and errors made by mortgage lenders, and it's useful reading for any would-be home buyer. Or, it would be useful reading if anyone could make any sense of it. Luckily, you've got us to do that for you. Let's translate the report into plain English!
1. Watch out for kickbacks
What it says: "Regulation Z prohibits a loan originator from receiving compensation based, directly or indirectly, on the terms of a consumer credit transaction secured by a dwelling."
What it means: Your mortgage broker or loan officer isn't allowed to make money by sending you to an affiliate, like a title company or home inspector, or for getting you to agree to a higher interest rate or other costly loan terms.
What you can do: Do your research! Check out any third party your lender recommends to make sure there are no conflicts of interest. Ask friends and family for other suggestions.
2. Beware the bait and switch
What it says: "Regulation X requires that a loan originator be bound, within the applicable tolerances, to the settlement charges and terms listed on the Good Faith Estimate (GFE) provided to the borrower, unless a revised GFE is provided prior to settlement."
What it means: After you apply for a loan, the lender has to give you a GFE, which estimates your closing costs and loan terms. If anything changes, the lender has to clue you in by giving you an updated estimate. Then, just before closing, you'll get a final version, called the HUD-1.
However … both the GFE and HUD-1 are going to be replaced Aug. 1, 2015. Instead of a GFE, you will receive an official loan estimate no more than three days after applying for a mortgage. Instead of the HUD-1, you'll get a closing disclosure form no fewer than three days before closing. The principle remains the same: Your final loan information should be the same as your estimate, unless your lender informed you of any changes.
Bad lenders may change the documents on closing day -- usually by tacking on fees or increasing costs -- hoping that you'll be too invested to walk away. Some fees can change, but the big ones can't -- check out CFPB's specific regulations for more info.
What you can do: Tell your lender you need a revised estimate and an explanation of any changes. If your lender refuses, don't enter into the loan (and consider reporting it to the CFPB).
3. Don't trust a slowpoke
What it says: "Regulation X requires that a lender provide a GFE not later than three business days after it receives an application, or information sufficient to complete an application."
What it means: This one's straightforward. If it's been more than three days since you applied for a loan, and you haven't received a GFE or loan estimate, the lender is violating a Truth in Lending rule.
Plus, you can't be charged anything other than a credit check fee for getting a loan estimate, so watch out for that trick, too.
What you can do: You may want to switch lenders (hint, hint). Dealing with a lender that isn't observing the new Dodd-Frank regulations can be a sign the company has internal problems, even if it's just being slow. If it's charging you fees just to get a loan estimate, leave and don't look back.
4. Don't believe the hype
What it says: "Regulation Z requires advertisements to include disclosures when certain triggering terms are advertised. Examiners found in one or more institutions that social media advertising was not subject to monitoring or compliance audit, which are components of an effective compliance management system. Loan originators created their own advertisements and content."
What it means: Basically, a lender can't advertise a loan with the following "triggering" terms -- unless the ad also clearly states where the consumer can get full information on the conditions of the loan:
- The amount or percentage of any down payment
- The number of payments or period of repayment
- The amount of any payment
- The amount of any finance charge
There are other specific requirements, but at its core, this regulation is there to protect consumers from getting into a loan that is unfavorably different from what was advertised.
What you can do: Do your homework. Have your lender or mortgage broker give you all the specifics. Don't just go on the info you see in an ad on a social media site like Facebook or Twitter. (Seriously, don't get a mortgage based solely on a tweet!) Always shop around.
5. Patience has its limits
What it says: "Regulation B requires a lender to notify an applicant of action taken within 30 days after receiving a completed application regarding the creditor's adverse action on the application."
What it means: Your lender has 30 days to approve or deny your loan. If it denies your loan, the lender has to state why.
What you can do: Unfortunately, if the lender has kept you waiting more than 30 days, you can't do much short of reporting it to the CFPB. But if you have been denied a mortgage, it's time to get your credit rating in shape and become a stronger candidate for the next go-round.
6. Trust wisely
What it says: "A sound and robust compliance management system is essential to ensuring compliance with Federal consumer financial law and preventing associated risks of harm to consumers. As noted in previous issues of Supervisory Highlights, an effective compliance management system includes board and management oversight, a compliance program, a consumer complaint management program, and a compliance audit program."
What it means: A good lender will have a system in place to make sure its practices are complying with regulations at every step. This means having a trained and knowledgeable staff.
What you can do: Pick a reputable lender. Ask your family, friends, and real estate agent for recommendations on trusted institutions that are known to follow regulations and do honest work.
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