Bill to protect lock-in rates has hidden pitfalls


Washington -- Homebuyers would get new federal interest rate lock-in protections on their mortgage applications under a massive new banking bill heading for floor action in the House of Representatives.

The same bill, however, would strip away key rights that consumers won for the first time last year to ward off abuses by rate-gouging home lenders. Here's what happened just before Congress headed home for its July 4 recess week.

Tucked away in the Republican-sponsored Financial Institutions Regulatory Relief Act (H.R. 1362) is an innocuous-sounding amendment sponsored by Rep. Joseph P. Kennedy II, D-Mass., referring to "lock-in promises."

At first glance, it appears to simply instruct lenders to add a new disclosure to their current mandatory truth-in-lending statements distributed to mortgage borrowers three business days after application.

The additional disclosure would indicate the note rate on the loan and the "points" quoted by the lender, and would include a statement as to whether these initial quotes could change at some later date before loan closing. (A point is a fee equal to 1 percent of the mortgage amount. Most loans come with at least one -- and more typically two or three -- points attached.)

No big deal. The lender quotes you 8 1/2 percent and two points, puts it in writing, and includes a stock sentence noting that the rate and points "are subject to change."

But the new House banking committee-approved bill takes things much further. In addition to the disclosures, all mortgage lenders making loans to homebuyers would have to deliver the initially quoted rate and points unless they had:

* "Clearly and conspicuously" informed the consumer that the rTC quotes expired at some stated date; and

* "Promptly and clearly" communicated to you the specific documents or other information you are required to submit to close the loan.

The objective of Kennedy's amendment, according to a legislative aide, is to eliminate situations where lenders are tempted to stall closings beyond rate-lock expiration dates because interest rates have risen since the initial application.

Depending upon where you live or how the contract was worded, you may already have grounds to challenge a rate-lock expiration under state law. But you have no remedies under federal law -- a hole the Kennedy amendment would fill.

Don't bet the house on this truth-in-lending expansion quite yet, though. Some Republicans are scratching their heads wondering how the banking committee let this provision into an otherwise staunchly pro-lender piece of legislation in the first place. They may try to kill it on the floor later this month.

Meanwhile, bad news for low- and moderate-income borrowers: The deregulation bill in its current form eviscerates last year's "high-cost mortgage" consumer safeguards.

Stay tuned.

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