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New federal mortgage laws set to go into effect

Federal rules aimed at taking surprises out of mortgage shopping will kick in Thursday, from changes that could affect the closing date to disclosures of estimated borrowing costs.

Under the Mortgage Disclosure Improvement Act passed by Congress last year, one of the biggest changes bars lenders from charging upfront fees, except for a reasonable credit check, and allows charges only after the work is done. Before, consumers would often have to pay upward of $300 upfront for application processing and other services - lenders wanted serious applicants and loathed the idea of doing work only to have consumers walk to competitors.

Allowing most charges only at the back end could lead to more informed borrowers and less costly comparison shopping, supporters of the changes said, because lenders probably won't want to take on unnecessary work in case they don't get paid.

"The new design now is to provide consumers a better ability to shop and to understand the documents that have been given to them," said Rholda Ricketts, New York State deputy superintendent of banks.

In approving changes, regulators, lawmakers and industry leaders sought a cleaner, more standardized template for mortgage shopping to prevent some of the borrower shock that contributed to the foreclosure crisis. Borrowers would go to closings and find that fees or interest rates were higher than expected, then be pressured to close anyway, experts say. Others rushed to sign mortgages without thinking through the costs.

Another major change includes a seven-day waiting period for the closing. It kicks in once the lender has dropped the cost disclosure in the mail or delivered it.

Some former and current mortgage shoppers said they welcomed the changes but added that they won't do much good unless borrowers are aware of them.

"I want to be fully informed before I sign anything," said Wyandanch resident Cheryl Reynolds, who is house hunting in Central Islip. "This is a lifetime commitment for me, and I need to fully understand what I'm getting into."

The changes apply to fixed-rate mortgages so far, but the Federal Reserve Board is discussing disclosure standards for adjustable rate mortgages.

The Mortgage Bankers Association backed most of the changes, despite some concern about closing delays.

"Our biggest concern right now is timing - how much is this going to delay the closing process?" said John Mechem, spokesman for the trade group. "We've long supported full disclosure, better disclosures, simpler disclosures. But we want to make sure there's a balance between that and getting a closing done within a reasonable amount of time."

The waiting period can cause a ripple effect in a chain of house sales, he said, and also cost the borrowers, from rescheduling movers to staying at a hotel because they don't have the keys to the new home.

The changes are kicking in two days after federal regulators pressed lenders and mortgage servicers to ramp up what one leading House lawmaker called a "great disappointment" in the number of loan modifications and other help for troubled homeowners.

Wednesday, the chairman of the powerful House Financial Services Committee, Barney Frank (D-Mass.), threatened to revive a bill that would give bankruptcy judges the power to modify home loans.

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