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Closing Isn't Like Cramming for an Exam

APR 28, 2014 11:41am ET
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The CFPB last week made news by publicly recognizing that borrowers felt overwhelmed in regard to the closing process. While the need for a technological solution is necessary, it is, respectfully, short sighted and naive to think that merely adapting the closing process can fix the problem.

Indeed, the CFPB suggests that borrowers are overwhelmed by information and do not have enough time to review it in connection with closing.

Before hurrying to completely redo the closing process, one has to wonder whether giving borrowers more time and/or a little less information at closing would actually resolve the situation in whole or part.

In reality most borrowers—even when given the time to thoroughly review closing documents—could not and would not try to thoroughly understand them.

As one who has had to read these materials carefully in regard to defending lawsuits, security instruments and mortgage notes are not designed to be read by just anyone—certainly not in any reasonable amount of time to conduct a particular transaction.

Moreover, the information contained in these documents includes terms and phrases whose meaning is not apparent to the average borrower and thus without a baseline of understanding, the information is of limited usefulness.

For instance, even if the borrower reads that they are taking out an adjustable mortgage with a 2.25 index rate, if the borrower does not understand the significance of the terms, it will not matter how much time is provided to read the document at closing.

Rather than simply focusing on the closing process, lenders should consider ways to increase the borrowers' understanding from the very beginning of the loan. Borrowers that understand the process and potential complications from the outset are more likely to understand what is happening and why, as well as the significance of information during the loan process.

Thus, closing becomes a final review—not a first and last review. Such processes lead to better loans, happier borrowers and better outcomes for lenders.

At present there are emerging products that aim on improving borrower knowledge and certainty throughout the loan process.

Lenders—and the CFPB—should look at these options as they may provide the real key to ensuring successful loans. Trying to learn everything about a loan at closing—no matter how much time is given—is simply a case of too little too late.

Ari Karen is an attorney at Offit Kurman.

Comments (2)
It is sometimes good to provide more detailed background and proper context on something before one writes about things. The closing panel event is really in anticipation of the final Combined or Integrated Disclosure reg that is going to be effective August 1st, 2015. To address Ari's point, the sole purpose was to get consumer feedback on making the disclosure process for both the initial (new Loan Estimate) and (Final Disclosure) which replaces the old GFE/TIL & HUD-1 forms that were very confusing to the consumer. Providing more logical forms is one thing, but implementing a better process, (three day delivery rule) to seek help and time to better understand them is also a good thing.
Posted by Tim A | Monday, April 28 2014 at 2:20PM ET
I applaud the three day review period for the Integrated Closing Disclosure, but an dismayed there is no requirement for a Lender Representative available to the borrowers and present at the closing table. Years ago when I was a Loan Officer, I attended all of my closings. If the borrowers had a question about the loan program or the documents, I was able to provide that service. In most instances, the settlement agent does not have sufficient knowledge about the transaction to provide that level of service.
Posted by Brenda C | Tuesday, April 29 2014 at 1:46PM ET
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