I thought about these things when I got an email this week describing a sales technique banks are using with potential mortgage clients. In a nutshell, they’re arguing that if you originate your loan with a broker, there’s a very good chance you’ll have your closing delayed due to the re-disclosure provisions of Reg Z; whereas a bank, unhindered by such nuisances, can get you to closing quicker. Therefore—by this logic—banks are the better bet.

hmmm…This is clearly folly. So do I answer it? Or do I let it go?

At the risk of “being like him myself” and just adding to the noise, I’m going to answer it because there’s more to this than an argument between banker and broker. There’s also the client whom these rules are meant to protect.

As I pondered how to respond, my first thought was—naturally—defensive. After all, I’m a broker, and them are fightin words. But then I thought, hang on. Rather than turn this into a mud fight, this might actually be an open door for re-emphasizing how a good broker is still your client’s best option.

Let’s start with Reg Z. The re-disclosure piece to TIL (truth in lending) was intended to prevent the bait and switch. You know how it works. A client is informed early in the process about the rate and certain fees (the bait), but when she sits down at the closing table, lo and behold, they’ve changed, gotten bigger, multiplied even (the switch). Most people don’t walk away from the table at this point, and that’s why the practice has been so lucrative.

A couple of observations…

1.  The law was meant to protect consumers from a dishonest practice. So why originate a loan with someone exempt from it? The incentive to be as truthful as possible as early as possible on disclosure of all the costs involved lies not with the bank LO who’s exempt from this part of Reg Z, but on the broker whose livelihood depends on compliance with it. Your client has a stronger basis for trust with the one who has the stronger incentive for full disclosure.

2.  Brokers who used such practices were also those likely to push b-grade paper, and those guys are gone. If your broker has survived the shake-out of the industry, then you’re most likely dealing with someone who’s been doing things right and above-board. Banks haven’t experienced the same “refining” effect of the housing crisis that mortgage brokers have. And if such brokers have survived, there’s a good chance that they’re doing it as bank LOs.

A couple of strong arguments aside from Reg Z considerations…

1.  Speaking of survival, you might not realize just what keeping the doors open has entailed for me—and brokers like me—over the past few years. Those still standing went through something like this:

• 3 hour state-administered test on everything from calculating APR to TIL to past laws pertaining to the mortgage-lending industry
• An audit of accounting books, procedures, financial position, and a random audit of ALL files (closed and withdrawn) from the past 36 months
• A net worth requirement at all times of $70,000 liquid cash in a bank

…and no bank LO can say any of that. Don’t hear me wrong. There are good, conscientious loan officers working out of banks, but they simply haven’t proven their professional commitment to the industry in the same concrete, measurable ways.

2.  And this may get to the heart of the matter better than anything else–By definition a broker provides flexibility that a bank LO just can’t. When my client is declined a loan from Lender A, I find out why, look for a remedy, help my client make adjustments, and then move on to Lender B. And I can do the same for Lenders C,D,E,F,G,H…you get the idea. But a NO from the bank is a NO to that client. No loan, no mortgage, no house, not from us anyway.

I hope that you can hear in this, and in all of my letters and blog posts and emails, that this is not just a “job” for me. It has been and continues to be a crucial part of my life’s purpose. Bringing excellent advice, service and rates to the mortgage industry—as low as it has stooped in the past—is what I do. And I’m not going anywhere.

I’m no Solomon, but I do know the mortgage lending business. And while banks are promoting their Reg Z exemption as an advantage and calling it wisdom, a closer look shows such thinking for the folly that it really is.

If you’re buying a home or refinancing after July 30 of this year, things just got a little more complicated. But don’t worry—it’s all intended for your good. Broadly speaking, the Federal Reserve Board is trying to help you be better informed. Specifically, it hopes to:

• Improve the disclosure of your loan’s APR to better capture fees and settlement costs
• Require lenders to show how your APR compares to the average rate for borrowers with excellent credit
• Require lenders to provide final Truth in Lending Act disclosures so that you receive them at least three business days before loan closing
• Require lenders to show how much your monthly payments might increase for adjustable-rate mortgages
• Prohibit payments to a mortgage broker or a loan officer that are based on your loan’s interest rate or other terms
• Prohibit a mortgage broker or loan officer from “steering” you toward transactions that are not in your best interest in order to increase compensation

For you, the consumer, these are good protections. But keep that in mind when these protections come to you (primarily) in the form of processing-time requirements, some of which may try your patience…

1. Lenders must provide estimates of mortgage loan costs within 3 business days of the application. This is called early disclosure. No fees (except a reasonable fee for a credit report) may be collected before disclosure.
2. A 5-day period after application must elapse before appraisal costs can be collected.
3. A 7-day waiting period is required between early disclosure and closing.
4. An additional 3-day period must be added before closing if APR changes by more than an eighth of a percent.
5. A 4-day period is required between the day the appraisal is given to the borrower and closing.

It may look to you more inconvenient than it actually is. Many of these requirements overlap each other, so the process isn’t lengthened all that much. But if looks complicated, you’re right—it is. But your loan officer should know these ins and outs well (it’s in my best interest since I’m the one on the hook if I screw up).

Either way, it’s helpful to the whole process if you’re better informed on how the Feds are keeping you better informed.