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March 8, 2004, Revised July 16, 2004
"Is there anything important
that I ought to know when I shop for a mortgage that lenders are not required to
disclose to me under Truth in Lending?"
Great question. I have identified 6
pieces of information that meet your specs. Not all apply to every borrower, but
some do.
Does My Loan Have a Prepayment
Penalty Clause? This is
a biggie that applies to every borrower. Some might be puzzled as to why I
included it, since there is a statement about prepayment penalty on the TIL
form. Unfortunately, the way the statement is worded is so ambiguous, and its
placement on the form so distracting, that untold numbers of borrowers sign
their TIL without every realizing that they are subject to a penalty. Readers
interested in this classic illustration of how not to disclose will find the
details on Disclosure of
Prepayment Penalty.
All you must remember is that, if
the TIL says that you "may have to pay a penalty", it means you will
have to pay a penalty.
What Are Total Lender Fees? In
addition to points, which are an upfront charge expressed as a percent of the
loan, lenders also charge a variety of fees that are expressed in dollars �
they do not change with the size of the loan. These fees are not disclosed on
the TIL. They are shown on the Good Faith Estimate (GFE), which is a separate
disclosure document administered by HUD. However, the GFE intermixes lender fees
with third party charges, provides no total, and does not commit the lender,
since the numbers are "estimates".
When you "lock" the price
of the loan, the lender is committed to the rate and points but not to fees.
That paves the way for larceny at the closing table. The Federal Reserve could
easily prevent this by requiring that all locks apply to the APR, which is
calculated from the rate and all lender fees. But it doesn�t, so borrowers
must fend for themselves.
Say to the lender, "please
specify, in writing, the total dollar fees I will pay at closing, and sign
it." You don�t care about the individual fees, only the total matters.
Many lenders already do this without being asked, and they all would if shoppers
demanded it.
What Is the Margin?
This applies to adjustable rate mortgages (ARMs) only. The margin on an ARM is
the lender�s markup -- the amount the lender adds to the interest rate index
on a rate adjustment date to obtain the new interest rate. It can be 1.5%; it
can also be 6.5%.
Lenders always quote the initial
rate on an ARM but they seldom quote the margin and it is not a required
disclosure. On an increasing number of ARMs, the initial rate holds only for 1-3
months. (This includes all flexible payment or option ARMs and all home equity
lines). On these loans, the borrower knows the interest rate for the first few
months, but often doesn�t know the lender�s markup over the remaining 29
plus years.
Ask the lender for the margin on
your ARM, in writing.
Is This a Simple Interest Loan?
On simple interest loans, interest accrues daily instead of monthly, imposing a
stiff penalty on borrowers who pay past the due date. Most of the borrowers who
write me about their problems with simple interest loans never knew they had one
until the problems emerged. TIL does not require lenders to disclose it.
It is a good idea to ask, but you
aren�t going to know for sure unless you read the note before signing it at
closing, and you may not know even then. I have seen cases where borrowers were
switched to simple interest when the servicing of their loan was sold. The new
servicer switched all loans where the note did not prohibit it. This is another
reason why borrowers should be able to fire their servicing agent.
What Is Your Subordination Policy?
Very few borrowers who take out a second mortgage are aware that the second
mortgage lender can prevent them from refinancing their first mortgage. When the
existing first mortgage is repaid, the existing second mortgage automatically
becomes the first mortgage -- unless the second mortgage lender is
willing to subordinate his claim to that of the lender providing the new
mortgage into which the borrower is refinancing.
Policies of second mortgage lenders
regarding subordination vary all over the lot, from a small fee and no
conditions to absolute prohibition. Borrowers taking a second mortgage should
get the lender�s subordination policy, in writing, before they close the loan.
A form for this purpose is contained in Why
Isn�t Subordination Disclosed?
Must I Pay For Mortgage
Insurance? Most borrowers
either understand that they must purchase mortgage insurance if they put less
than 20% down, or the loan provider tells them. Nonetheless, I receive a
surprising number of letters from borrowers who were surprised to find that
their monthly obligation included a mortgage insurance premium.
The TIL does show a monthly payment
schedule which includes any mortgage insurance premium, but the premium is not
broken out. Innocent borrowers who go through the process without becoming aware
of mortgage insurance are not likely to discover it by comparing the payment
schedule shown on the TIL with a payment they calculate from the information in
the note.
Why aren�t these items disclosed?
Not because there isn't room on the form, or because of a concern about
overloading borrowers' capacity to absorb information. The list of mandated
disclosures that are completely useless or worse is much longer than my list of
omissions. The reason is that the Federal Reserve gives its responsibilities
under TIL a low priority. It has never been willing to use its political capital
to acquire the powers it needs from the Congress to do a decent job.
Copyright Jack Guttentag 2004
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