4 rules mortgage lenders must follow
The Federal Reserve's disclosure requirements for mortgages are designed to protect consumers from nonrefundable fees and higher interest rates.
The rules, which took effect in 2009, also apply to home equity loans but not home equity lines of credit.
They require lenders to:
- Provide a good faith estimate (GFE) of a mortgage's full cost within three business days of receiving an application.
- Not charge any fees until consumers receive the GFE. The only fee lenders can ask for up front is a "reasonable fee" for obtaining the consumer's credit history.
- Wait seven business days after providing the initial loan costs before closing the loan.
- Offer a new estimate of the loan costs three business days before the closing date if the original annual percentage rate (APR) increases by more than one-eighth of a percentage point.
The three days doesn't start until the borrower receives the new GFE (or three days after the new good faith estimate is mailed), giving borrowers a total of six days from the postmark date.
Those rules make it impossible for lenders to spring a higher interest rate on customers at the closing when they're under intense pressure to proceed with the purchase regardless of the cost.
They also prevent mortgage brokers from deliberately underestimating interest rates to collect hundreds of dollars in nonrefundable fees before revealing the true cost of the home loan in the GFE.
The one exception to the rule: Lenders don't have to provide a new GFE if the interest rate goes down.
If you're applying for a home loan, here are the 8 critical questions your good faith estimate should answer and 6 smart moves to save on closing costs.