Truth in Lending: What Isn't Disclosed That Should Be?
March 8, 2004, Revised July 16, 2004, Revised November 10, 2006, July
30, 2007, July 20, 2009
"Is there anything important that I ought to know when I shop for a mortgage that lenders are not required to disclose to me under Truth in Lending?"
Great question. I have identified 6 pieces of information that meet your specs. Not all apply to every borrower, but some do.
This is a biggie that applies to every borrower. Some might be puzzled as to why I included it, since there is a statement about prepayment penalty on the TIL form. Unfortunately, the way the statement is worded is so ambiguous, and its placement on the form so distracting, that untold numbers of borrowers sign their TIL without every realizing that they are subject to a penalty. Readers interested in this classic illustration of how not to disclose will find the details on Disclosure Rules on Mortgage Prepayment Penalties.
All you must remember is that, if the TIL says that you "may have to pay a penalty", it means you will have to pay a penalty.
In addition to points, which are an upfront charge expressed as a percent of the loan, lenders also charge a variety of fees that are expressed in dollars – they do not change with the size of the loan. These fees are on the TIL. but hidden from view. The borrower must know enough to subtract the "amount financed" from the loan amount, which I doubt that one borrower out of 100 will do. For all practical purposes, it is not there. Even if the borrower figures it out, the lender is not committed to the number.
Total lender fees are shown on the Good Faith Estimate (GFE), which is a separate disclosure document administered by HUD. However, the GFE intermixes lender fees with third party charges, provides no total, and does not commit the lender, since the numbers are "estimates". See Does the Good Faith Estimate Help?
When you "lock" the price of the loan, the lender is committed to the rate and points but not to fees. That paves the way for larceny at the closing table. The Federal Reserve could easily prevent this by requiring that all locks apply to the APR, which is calculated from the rate and all lender fees. See Why Isn't the APR Locked With the Rate? But it doesn’t, so borrowers must fend for themselves.
Say to the lender, "please specify, in writing, the total dollar fees I will pay you at closing, and sign it." You don’t care about the individual fees, only the total matters. Many lenders already do this without being asked, and they all would if shoppers demanded it.
This applies to adjustable rate mortgages (ARMs) only. The margin on an ARM is the lender’s markup -- the amount the lender adds to the interest rate index on a rate adjustment date to obtain the new interest rate. It can be 1.5%; it can also be 8.5%.
Lenders always quote the initial rate on an ARM but they seldom quote the margin and it is not a required disclosure. On many ARMs, the initial rate holds only for 1-3 months. (This includes flexible payment or option ARMs and all home equity lines). On these loans, the borrower knows the interest rate for the first few months, but often doesn’t know the lender’s markup over the remaining 29 plus years. See Questions About Option (Flexible Payment) ARMs, and How Do You Shop For a HELOC?
Ask the lender for the margin on your ARM, in writing.
On simple interest loans, interest accrues daily instead of monthly, imposing a stiff penalty on borrowers who pay past the due date. Most of the borrowers who write me about their problems with simple interest loans never knew they had one until the problems emerged. TIL does not require lenders to disclose it. See What Are Simple Interest Mortgages?
It is a good idea to ask, but you aren’t going to know for sure unless you read the note before signing it at closing, and you may not know even then. I have seen cases where borrowers were switched to simple interest when the servicing of their loan was sold. The new servicer switched all loans where the note did not prohibit it. This is another reason why borrowers should be able to fire their servicing agent.
On this variant, a daily rate is calculated using a 360-day year, and converted into a monthly rate based on the number of days in the month. Interest due for the month thus depends on the number of days in the month. See The 360-Day Year: Does It Matter to Borrowers?
As with a simple interest mortgage, whether or not you calculate the daily rate using 360 versus 365 days has a significant impact on the interest you pay over the life of the loan. The excess payments would be the same on both types of mortgages if borrowers paid on the due date every month. To the extent that borrowers pay after the due date, however, the overpayments would be larger on the simple interest mortgages.
Very few borrowers who take out a second mortgage are aware that the second mortgage lender can prevent them from refinancing their first mortgage. When the existing first mortgage is repaid, the existing second mortgage automatically becomes the first mortgage -- unless the second mortgage lender is willing to subordinate his claim to that of the lender providing the new mortgage into which the borrower is refinancing.
Policies of second mortgage lenders regarding subordination vary all over the lot, from a small fee and no conditions to absolute prohibition. Borrowers taking a second mortgage should get the lender’s subordination policy, in writing, before they close the loan. A form for this purpose is contained in Why Isn’t Subordination Disclosed?
Most borrowers either understand that they must purchase mortgage insurance if they put less than 20% down, or the loan provider tells them. (An alternative is a higher-rate second mortgage, or "piggyback".) Nonetheless, I receive a surprising number of letters from borrowers who were surprised to find that their monthly obligation included a mortgage insurance premium.
The TIL does show a monthly payment schedule which includes any mortgage insurance premium, but the premium is not broken out. Innocent borrowers who go through the process without becoming aware of mortgage insurance are not likely to discover it by comparing the payment schedule shown on the TIL with a payment they calculate from the information in the note.
Why aren’t these items disclosed? Not because there isn't room on the form, or because of a concern about overloading borrowers' capacity to absorb information. The list of mandated disclosures that are completely useless or worse is much longer than my list of omissions. The reason is that the Federal Reserve gives its responsibilities under TIL a low priority. It has never been willing to use its political capital to acquire the powers it needs from the Congress to do a decent job.
"Is there anything important that I ought to know when I shop for a mortgage that lenders are not required to disclose to me under Truth in Lending?"
Great question. I have identified 6 pieces of information that meet your specs. Not all apply to every borrower, but some do.
Does My Loan Have a Prepayment Penalty Clause?
This is a biggie that applies to every borrower. Some might be puzzled as to why I included it, since there is a statement about prepayment penalty on the TIL form. Unfortunately, the way the statement is worded is so ambiguous, and its placement on the form so distracting, that untold numbers of borrowers sign their TIL without every realizing that they are subject to a penalty. Readers interested in this classic illustration of how not to disclose will find the details on Disclosure Rules on Mortgage Prepayment Penalties.
All you must remember is that, if the TIL says that you "may have to pay a penalty", it means you will have to pay a penalty.
What Are Total Lender Fees?
In addition to points, which are an upfront charge expressed as a percent of the loan, lenders also charge a variety of fees that are expressed in dollars – they do not change with the size of the loan. These fees are on the TIL. but hidden from view. The borrower must know enough to subtract the "amount financed" from the loan amount, which I doubt that one borrower out of 100 will do. For all practical purposes, it is not there. Even if the borrower figures it out, the lender is not committed to the number.
Total lender fees are shown on the Good Faith Estimate (GFE), which is a separate disclosure document administered by HUD. However, the GFE intermixes lender fees with third party charges, provides no total, and does not commit the lender, since the numbers are "estimates". See Does the Good Faith Estimate Help?
When you "lock" the price of the loan, the lender is committed to the rate and points but not to fees. That paves the way for larceny at the closing table. The Federal Reserve could easily prevent this by requiring that all locks apply to the APR, which is calculated from the rate and all lender fees. See Why Isn't the APR Locked With the Rate? But it doesn’t, so borrowers must fend for themselves.
Say to the lender, "please specify, in writing, the total dollar fees I will pay you at closing, and sign it." You don’t care about the individual fees, only the total matters. Many lenders already do this without being asked, and they all would if shoppers demanded it.
What Is the Margin?
This applies to adjustable rate mortgages (ARMs) only. The margin on an ARM is the lender’s markup -- the amount the lender adds to the interest rate index on a rate adjustment date to obtain the new interest rate. It can be 1.5%; it can also be 8.5%.
Lenders always quote the initial rate on an ARM but they seldom quote the margin and it is not a required disclosure. On many ARMs, the initial rate holds only for 1-3 months. (This includes flexible payment or option ARMs and all home equity lines). On these loans, the borrower knows the interest rate for the first few months, but often doesn’t know the lender’s markup over the remaining 29 plus years. See Questions About Option (Flexible Payment) ARMs, and How Do You Shop For a HELOC?
Ask the lender for the margin on your ARM, in writing.
Is This a Simple Interest Loan?
On simple interest loans, interest accrues daily instead of monthly, imposing a stiff penalty on borrowers who pay past the due date. Most of the borrowers who write me about their problems with simple interest loans never knew they had one until the problems emerged. TIL does not require lenders to disclose it. See What Are Simple Interest Mortgages?
It is a good idea to ask, but you aren’t going to know for sure unless you read the note before signing it at closing, and you may not know even then. I have seen cases where borrowers were switched to simple interest when the servicing of their loan was sold. The new servicer switched all loans where the note did not prohibit it. This is another reason why borrowers should be able to fire their servicing agent.
Does This Mortgage Accrue Interest Monthly Using a Daily Rate and a 360-Day Year?
On this variant, a daily rate is calculated using a 360-day year, and converted into a monthly rate based on the number of days in the month. Interest due for the month thus depends on the number of days in the month. See The 360-Day Year: Does It Matter to Borrowers?
As with a simple interest mortgage, whether or not you calculate the daily rate using 360 versus 365 days has a significant impact on the interest you pay over the life of the loan. The excess payments would be the same on both types of mortgages if borrowers paid on the due date every month. To the extent that borrowers pay after the due date, however, the overpayments would be larger on the simple interest mortgages.
What Is Your Subordination Policy?
Very few borrowers who take out a second mortgage are aware that the second mortgage lender can prevent them from refinancing their first mortgage. When the existing first mortgage is repaid, the existing second mortgage automatically becomes the first mortgage -- unless the second mortgage lender is willing to subordinate his claim to that of the lender providing the new mortgage into which the borrower is refinancing.
Policies of second mortgage lenders regarding subordination vary all over the lot, from a small fee and no conditions to absolute prohibition. Borrowers taking a second mortgage should get the lender’s subordination policy, in writing, before they close the loan. A form for this purpose is contained in Why Isn’t Subordination Disclosed?
Must I Pay For Mortgage Insurance?
Most borrowers either understand that they must purchase mortgage insurance if they put less than 20% down, or the loan provider tells them. (An alternative is a higher-rate second mortgage, or "piggyback".) Nonetheless, I receive a surprising number of letters from borrowers who were surprised to find that their monthly obligation included a mortgage insurance premium.
The TIL does show a monthly payment schedule which includes any mortgage insurance premium, but the premium is not broken out. Innocent borrowers who go through the process without becoming aware of mortgage insurance are not likely to discover it by comparing the payment schedule shown on the TIL with a payment they calculate from the information in the note.
Why aren’t these items disclosed? Not because there isn't room on the form, or because of a concern about overloading borrowers' capacity to absorb information. The list of mandated disclosures that are completely useless or worse is much longer than my list of omissions. The reason is that the Federal Reserve gives its responsibilities under TIL a low priority. It has never been willing to use its political capital to acquire the powers it needs from the Congress to do a decent job.