Senate Mulls Mortgage Disclosure Rule

Inevitably, excesses are followed by calls for corrective legislation.

That’s exactly what has happened in the wake of consumer complaints about lenders who failed to deliver mortgages at interest rates that were supposedly “locked in.”

Complaints were so pervasive and incisive that legislative proposals are being discussed on Capitol Hill regarding mortgage commitments and whether lenders should be legally prevented from changing rates from the time a commitment is issued until the loan is actually made.

Under the direction of chairman William Proxmire (D-Wis.), the powerful Senate Banking Committee is considering legislation that would require new federal disclosure requirements for all mortgage lenders.

Under discussion, according to Capitol Hill sources, are legal requirements that would force lenders to disclose to every approved loan applicant the mortgage interest rate, ancillary fees and the date at which the loan terms would continue to be guaranteed. So far, no date for hearings has been set.

Similar legislation has been introduced by Rep. Dean A. Gallo (R-N. J.).

In recent months, while mortgage rates generally moved upward by one and more percentage points, more than a few lenders have reneged on commitments made earlier this year, thereby really forcing--through lack of choice--some unwary home buyers to the brink of closing with no choice other than a higher interest rate.

“This situation is inimical to the normal procedures that are part of buying and selling houses,” said Washington realtor Earl Farr. He added that the entire procedure of qualifying a buyer for a home mortgage is clouded when that prospective buyer has already stretched every financial muscle to qualify for a loan.

“Then the lender raises the rate at the last minute and the buyer--whose financial seams are already stretched--must really take emergency measures to meet the loan terms and also faces an increased likelihood of payment delinquency/foreclosure down the road,” Farr added.

Although loan commitment legislation has been discussed from time to time, according to mortgage banking lobbyist Burton C. Wood, “interest in such legislation intensified this spring after mortgage interest rates surged due to the declining dollar (value) and wildly fluctuating bond prices.

Lenders and borrowers were caught by surprise, and lenders had no choice but to require higher interest rates, or points. Lenders were found to be quoting rates hourly, with some (rates) rising as high as 11%.”

Not surprisingly, consumer groups advocate corrective action. But Wood, senior staff vice president for the Mortgage Bankers Assn., asserted that those reform-minded groups had to concede that lenders had difficulties during periods of sharp interest rate changes--especially upward. The home-buying borrower now bears the burden of such upward rate changes, however.

But there’s also the problem of mortgage rates going down. Wood recalled that the MBA brought that problem to the attention of the House of Representatives housing subcommittee in July, 1986, when mortgage loan volume skyrocketed as interest rates plunged to an eight-year low.

“That rush of business caused great problems as borrowers stampeded lenders to take advantage of lower rates,” Wood recalled.

As an advocate of mortgage banking and also as a former Federal Housing Agency official and lobbyist for home builders, Wood took pains to point out that mortgage lenders do not have “full control of the entire loan application process.”

He noted that some home buyers hold lenders accountable for aspects of the process over which the lender has no real control. In explaining the role of the mortgage banker, Wood noted that windfall profits do not necessarily accrue to the mortgage bankers when rates change precipitously.

Additionally, Wood insisted that lenders make commitments to borrowers as “accommodations, which customarily can be fulfilled.” Borrowers are not “bound” to accept commitments. Many buyers shop around and make more than one loan application.

Therefore, Wood has been warning MBA members that the process of mortgage commitments is under congressional scrutiny and “there could be serious implications for the (mortgage bank) industry.”