Do you ever read the rules, regulations and terms before checking the box to complete a transaction?
I rarely do – partly because I’m as trustworthy as a toddler – and I think I’m part of the majority who don’t find it necessary. Often, it’s legal jargon that I can’t understand anyway.
Some mortgage loan originators have taken advantage of this confusion and trust for their own financial benefit, tacking on fees or increasing the interest rate to later get paid by the lender for doing so.
Just sign here, and then attach this “Duped” sticky note to your forehead.
The dishonesty that led to a lot of bad loans should (hopefully) be a thing of the past with changes announced by the Federal Reserve on Monday
. These changes to the Truth in Lending Act (TILA) and the Mortgage Disclosure Improvement Act (MDIA) are meant to prevent lenders from purposely deceitful practices.
Lenders are now required to make clear any risks of payment increases on a mortgage loan or fees attached to the loan. In addition to full disclosure, loan originators can no longer profit from getting the borrower to agree to an interest rate higher than the rate required by the lender (a practice that is known as a yield spread premium).Loan originators can still receive compensation from a percentage of the actual loan amount, but they cannot receive compensation by increasing the costs tied to the loan or bumping the interest rate.
Instead of ‘just sign here and be on your way,’ lenders must include a table that provides:
- The initial interest rate together with the corresponding monthly payment;
- For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a “worst case” example showing the maximum rate and payment possible over the life of the loan; and
- The fact that consumers might not be able to avoid increased payments by refinancing their loans.
The Federal Reserve came to these rulings by conducting interviews with consumers around the country. The Board found that most consumers are not aware that their loan originators receive compensation from lenders for certain changes made to the loan cost.
“The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate,” the Fed said, “thereby paying more in total compensation than they realize.”
The Federal Reserve also announced that consumers must now receive a notice when their mortgage loan has been sold or transferred
and proposed rule changes to protect consumers on jumbo loans
and reverse mortgages
These rule changes should benefit consumers; however, shady loan originators have found loopholes before and they will always find a way to the beat the system. The SAFE Act
and these changes should make that more difficult, and hopefully most shady loan officers are no longer practicing because of these changes, but there is still some borrower responsibility to do your homework.
To be safe, make sure you find a loan officer who you trust and educate yourself on the mortgage loan process. Read every document closely and do not be afraid to ask questions. A good loan officer will know the answers.
The government will continue to try to come up with laws and programs that protect consumers, but much of it is reactionary, and it’s up to you to make sure you do not get duped.