Washington -- If you're one of the millions of American homeowners with a less-than-perfect credit file, you should know about a major legal deadline looming in the mortgage market.
Lenders nationwide are gearing up this summer for the High Cost Mortgage Act, which takes effect Oct. 1. On that date, consumers will get new federal Truth-in-Lending protections when they refinance their home or take out a home equity loan with rates or fees that qualify as "high cost."
Though aimed primarily at loan-scam artists who prey on unsuspecting homeowners, the law cuts a far wider swath. Large numbers of mainstream borrowers who face temporary credit squeezes -- and the lenders who serve them -- are likely to be affected as well.
The new law defines a high-cost mortgage as one carrying the greater of $400 or 8 percent of the loan amount in fees as part of the financing transaction. Alternatively, the rate on the mortgage must be 10 percentage points above comparable Treasury note rates. Fixed-term home equity loans and mortgage refinancings are covered by the law; home purchase loans and equity lines of credit are exempt.
The $400 or 8 percent test touches many mortgage applicants who might not otherwise think of their loans as high rate or high cost. That's because under the law, all points, mortgage brokerage commissions and document preparation fees must be counted against the 8 percent threshold. On a modest-sized mortgage, 8 percent in fees mounts up fast. For example, on a $30,000 home equity loan, the threshold is $2,800.
In lower- and moderate-cost neighborhoods loan expenses on this level are not uncommon. Ditto in the so-called "B" and "C" segments of the mortgage market, where borrowers who've encountered layoffs or income disruptions have missed debt payments and are no longer "A" grade credit risks.
For loans that meet the "high cost" tests, applicants will receive special disclosures and rights:
* No less than three business days before closing, the lender must deliver a written statement to the borrower that tells applicants they can still cancel the deal, even though they signed up for it. It also warns that because the lender will have a mortgage on the house, "you could lose your home and any money you have put into it" if you go to closing and fail to make payments.
* Certain commonly used loan terms are banned outright on high-cost mortgages. All balloon-payment plans -- those requiring a lump-sum final payment -- are prohibited for loans with less than five-year terms. The sole exception will be "bridge" loans of less than one year used by consumers selling one house and building or buying another.
* Prepayment penalties generally are prohibited. So are negative amortization plans, which allow smaller monthly interest payments but add to total principal debt.
rTC But contrary to what Congress intended with the 8 percent threshold, says Columbia mortgage consultant Allen Hardester, some lenders are allowing brokers to come in with up to 7.99 percent in total points and fees. In many regions the charges previously would have been 2 to 4 points cheaper. "Congress has legitimized charging just under 8 points," Mr. Hardester says.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.