Congress took steps Friday to reform the mortgage disclosure laws, specifying new ways for lenders to deliver information to borrowers.

A Senate panel unveiled a proposal by the Federal Reserve Board and Department of Housing and Urban Development that would expand the definition of the annual percentage rate to include more fees.

The proposal also calls for lenders to meet certain requirements earlier in the application process, and for a reduction in paperwork.

Sen. Lauch Faircloth, R-N.C., said he would introduce legislation early next year to incorporate these changes in the Real Estate Settlement Procedures Act and Truth-in-Lending Act.

Elsewhere relating to mortgages, the Senate voted to raise the cap on FHA-backed loans, to $197,490 in high-cost housing markets and $108,960 in low-cost areas. The current limits are $170,362 and $86,317. The increase was contained in a spending bill for veterans and housing programs.

The House began debate on an identical measure but was not expected to vote until Tuesday.

"It is an improvement over the original proposal," said Brian P. Smith, director of policy at America's Community Bankers, who noted the group still objects to expanding the FHA jurisdiction because it will compete with private lenders.

The disclosure reforms were called for by regulators. They had support from Sen. Faircloth, chairman of the Senate Banking Committee's housing subcommittee, but got mixed reactions in the financial community.

"Despite a number of congressional actions ... today's mortgage lending process can still be characterized as confusing, costly, and far less than optimal," said Federal Reserve Board Governor Edward M. Gramlich.

"Consumers are handed 60 pages of disclosures to sign at the closing table, and many of these forms are never understood and are totally meaningless to begin with," said Sen. Faircloth.

"It is really not any wonder that the homebuyer is overwhelmed with the process and can't begin to comparison-shop for the lowest price."

The Fed and HUD proposed incremental, rather than radical, changes. They would:

Revise the annual percentage rate to include all the costs a consumer incurs for credit, including fees for credit reports, appraisals, and title insurance. Currently, some such items are excluded from the rate calculation.

Require lenders either to offer a bundle of settlement services at a guaranteed price, or provide a good-faith estimate that must be close to the actual costs. The agencies did not specify how far the number could be off without incurring a penalty.

Require lenders to give borrowers the HUD-1 settlement statement, which lists all closing costs, three days before closing.

Restrict or prohibit balloon payments on home equity loans and ban lump-sum credit insurance premiums.

Revamp foreclosure notices to include consumers' legal rights, ways to avoid foreclosure, and references to credit counseling.

Steven I. Zeisel, vice president and senior counsel of the Consumer Bankers Association, said banks would prefer to eliminate the APR rather than expand it.

"It really is not a very useful comparison tool," he said, "but we will take a look at that."

"This thing has evolved to a point where it's 100% focused on, 'What does this do to make things better for consumers?'" said Paul Mondor, senior director of regulatory affairs for the Mortgage Bankers Association.

"It does provide for some of the reforms that we were looking for, such as foreclosure reform," said Laura J. Borrelli, president of the National Home Equity Mortgage Association. But Ms. Borrelli, executive vice president of Residential Money Centers Inc., Montvale, N.J., said HUD's proposed crackdown on predatory lending would trigger numerous suits.

"It kind of looks like an annuity for the plaintiffs' bar," she said.

Kirk G. Willison, head of the Mortgage Reform Working Group, said a consensus has been hard to find among the industry, consumer groups, and regulators, but it is achievable.

"I don't want to see any organization right away calling this report dead on arrival or any other negative firebrand language," said Mr. Willison, whose group is comprised of lenders and consumer advocates. "I believe that it's clearly going to be the catalyst to restart active negotiations."

The federal agencies differed on some issues.

For instance, the Fed recommended that lenders disclose closing costs within three days after a borrower applies for a loan because many lenders lack the capability to calculate closing costs immediately.

"The Board believes its more flexible approach strikes the appropriate balance of encouraging greater certainty in cost figures at an early stage without mandating a standard that is currently impossible for many creditors," Mr. Gramlich said.

HUD, however, urged lawmakers to require loan officers to make disclosures at the first meeting because "technology is making this possible," said Gail Laster, HUD's general counsel.

HUD also recommended that Congress make it easier for consumers to shop for loans by requiring lenders to make disclosures before charging "significant" fees.

It said the initial disclosures to consumers should explain loan origination fees, private mortgage insurance, and escrow accounts.

HUD also asked Congress to establish a federal "deceptive acts and practices" standard that would give customers the right to sue lenders who take unfair advantage of them.

The housing agency also would establish a federal right to cure delinquent loans through pre-foreclosure sales, require pre-transaction counseling in some situations, and impose new information-collection requirements on certain creditors making home equity loans.

"We must recognize the desirability of the free flow of credit but we cannot be blind to the reality that the unwary customer can be greatly harmed," Ms. Laster said.

Two House Banking subcommittees are to hold a joint hearing July 22 on the proposal.

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