Home-mortgage lenders no longer would be able to hit buyers and refinancers with last-minute interest-rate switches under legislative proposals unveiled on Capitol Hill this week.
The Residential Mortgage Credit Fairness Act of 1987, introduced in the House by Rep. Dean A. Gallo (R-N.J.), would effectively outlaw the "lock-in shocks" that thousands of consumers experienced in April and May when mortgage rates spurted up by 2 percentage points.
It would force lenders to deliver the specific rates and terms that loan applicants originally signed up for, or face stiff federal fines. A similar bill is close to being introduced in the Senate by Banking Committee Chairman William Proxmire (D-Wis.). Congressional hearings are expected to be held on the issue later this year.
Here's a quick overview of how the legislation would change the home-mortgage application process nationwide:
The bill would amend the Truth-in-Lending Act so that no mortgage lender could "impose terms and conditions . . . which are less favorable to the consumer" than the ones quoted at the time of the original application disclosures.
In other words, if a lender handed you "good-faith" estimates or a preliminary commitment letter, then turned around and demanded a higher rate at closing, the lender would be in violation of federal law. The bill also would make a key change to the ground rules for lock-ins, or mortgage rate guarantees. It would prohibit lenders from offering lock-ins that are tied to time periods or expiration dates, such as the 30-, 45- or 60-day guarantees that are common today.
The idea behind the time-period ban, according to the bill sponsors, is to put mortgage lenders' feet to the fire and encourage speedier, more efficient processing of loan application documents. Foot-dragging by lenders -- allegedly to allow below-market-rate lock-in periods to expire -- has been one of the most consistent complaints by consumers this spring.
"A lock-in should be a lock-in should be a lock-in," said Michelle Meier, government affairs counsel for Consumers Union, a citizen's group actively seeking changes in the home-mortgage arena. "If you're locked in at 8 1/2 percent for 30 days and rates go up, what good is your lock-in? Not much, if the past few weeks are any guide."
Sponsors of the bill concede that lenders might initially balk at indefinite lock-in periods. Given competitive pressures in most local markets, however, efficient lenders should be able to offer and deliver lock-ins without undue risk, the bill's supporters say. Those lenders, in turn, would gain market share relative to their competition by providing a product the public clearly wants: a guaranteed mortgage rate, rather than a hope and a prayer.
The legislation would offer lenders the option to avoid the tougher standards on lock-ins, however. They would simply have to make a "clear and conspicuous statement" in their initial loan-disclosure documents that the quoted rate, fees and other terms are "subject to change before any credit is actually extended."
The intent here, according to sponsors, is to get the rules of the game out on the table early in the mortgage-application process. Rather than boiler-plate loan approval forms that appear to promise a locked-in rate -- but which contain fine-print conditions to the contrary -- the legislation would require absolute clarity.
Either the rate is guaranteed -- with no parachutes for the lender -- or it's not. In either case, the bill's sponsors say, there will be no doubt about it.
Other key provisions of the bill include: A three-day cooling-off period for borrowers to withdraw from the loan-commitment process after seeing the disclosed terms. A maximum fine of $10,000 for lenders who violate the law. An exemption from the requirements of the legislation when the borrower causes "unreasonable delay" that forestalls the closing.
The Gallo bill signals what could be the beginning of the end of a tradition in American home-mortgage lending: The heads-I-win, tails-you-lose school of loan application. As several hundred documented case studies and letters of complaint received by this column the past three weeks reveal, many people buying homes or refinancing find themselves at the mercy of their lenders prior to loan closings.
"It's the ancient principle at work: 'He who has the gold, makes the rules,' " said one Georgia reader.
If lenders give a written or verbal lock-in and rates rise, their printed documents often contain clauses that allow them to escape. Or, as dozens of readers have complained, they "misplace" loan papers, demand new appraisals and try a host of other time-eating tactics.
Gallo's answer to those tactics is attention-catching: $10,000 for every violation. That's lock-in shock in reverse.