- The Washington Times - Friday, July 6, 2007

As owner of a small mortgage company for more than 15 years, I see a disturbing trend in

the mortgage business — the industry becoming more irresponsible in its business and advertising practices.

History has proven that when an industry as a whole becomes irresponsible, consumers wake up and file complaints and the government steps in and starts to regulate. While this seem like a good thing for the consumer, history has also shown that too much regulation can be harmful to everyone.

Misleading advertising and inferior service is widespread in the mortgage business. Some recent observations aren’t pretty.

Consider:

m Homeowners across the country receive countless solicitation letters with misleading and false information. I have a stack full of letters that I have saved over the last year or so. Every one is misleading to some degree.

Perhaps the most outrageous letter I received boasts a 30-year fixed rate of 1.95 percent.

m I click on a mortgage advertisement on a very well known Web site. The hyperlink simply says, “Mortgage rates as low as 5.375 percent.” I go to the site and read the fine print, which is almost too small for my old eyes. It turns out the 5.375 percent is only good for six months, and the rate increases by 1 percentage point every six months thereafter.

The ad also confesses that the loan carries a 2.5 percent origination fee. That’s a pretty steep fee by industry standards.

m A recent study by the Federal Trade Commission found that nine out of 10 borrowers do not understand the charges and closing costs associated with their loans.

I’ve been helping folks with mortgages for 20 years and can say with confidence that not one client of mine has ever left my office without a full and comprehensive understanding of his loan, the terms and the charges, if any.

It’s the loan officer’s job to ensure that this happens.

The mortgage business is highly regulated as it is, but unfortunately many of the current laws don’t work very well.

Here are a couple of examples:

m The law requires that the lender issue a “truth-in-lending” statement at time of application. The form requires disclosure of the annual percentage rate (APR).

The APR is supposed to give the borrower the cost of the loan, expressed as an interest rate, when you consider the note rate and any upfront charges, closing costs and points.

This is a well-intended law because it shows the borrower that a low interest rate that carries thousands in upfront fees isn’t the bargain it appears to be.

The problem with the APR, however, is that it assumes the borrower will hold the loan to the full term, which is an impractical assumption.

If a loan with high fees and points is paid off early, the true APR would be much higher than the APR disclosed on the truth-in-lending form.

m The good faith estimate of closing costs is required to be sent to the borrower within three days of making the application.

What’s up with that? It seems to me that calculation and explanation of the closing costs should be part of the application process. It doesn’t help the borrower very much if he doesn’t know the terms and costs of the loan until three days after the application date.

While some disclosure laws are, indeed, effective, others have simply exacerbated the consumer’s confusion. It’s time for the mortgage industry to police its own people.

We need to stop hard-sell tactics, eliminate misleading advertisements and concentrate on what we’re paid to do — help folks choose the best loan, help them find the most competitive terms and ensure that they have a complete understand of their mortgage program.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@ pmcmortgage.com).

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