Simplifying Closings Could Be Complex for Lenders
The Consumer Financial Protection Bureau’s latest step toward revising closing forms promises to make them simpler for consumers, but the industry is dreading the work needed to change documentation.
The CFPB has cleaned up the forms quite a bit, says Phil Huff, CEO of technology provider Platinum Data Solutions. The forms make the information about the loan easier to understand for the consumer.
But lenders and vendors will have to do a lot of work on their systems, he adds. It will be painful for them, but these forms need to be revised because a lot of changes have occurred in the mortgage industry which the old forms did not take into account.
The new forms will reduce the number of problems between the borrower and the lender going forward, Huff says.
The creation of the disclosure forms is just the first step in the Consumer Financial Protection Bureau’s movement to simplify the closing process, says director Richard Cordray.
The CFPB is working on improving the closing experience, which it believes can be enhanced through the use of technology. It wants to reduce the stack of papers consumers have to sign at the closing table, and it will work with the industry and consumer advocates to cut down in size or eliminate documents which no longer add value to the transaction, he said at the agency’s field hearing on the new documents held in Boston.
This in turn will enable consumers to better understand their mortgage, he says.
The forms will be easier to understand only if the borrower takes the time to read them, says Rebecca Walzak, president of RJB Walzak Consulting. The consumer has not shown any inclination to read the disclosures, even the ones that are relatively straight-forward like the servicing transfer disclosure.
The new forms will allow for clearer disclosure of the loan terms and fees. This will allow originators and other in the process to develop better and stronger relationships with their customers, says Bart Shapiro, a partner in the Washington office of the law firm Offit Kurman and a former HUD and CFPB official. Consumers will now have a better understanding of what is going on during the process.
At the closing table it helps to build greater transparency because of the ability to check to see that the fees match what was given at the time of application.
It creates transparency, clarity, communication and information for the consumer, which in turns helps the originator do his or her job, he says.
There needs to be improved consumer financial literacy to really be successful. Improved disclosures and increased transparency can work best if consumers are educated about all aspects of their financial life, Shapiro says.
The consumer signs numerous documents and the process would be better if CFPB would find a way to reduce the package to contain just the most valuable information, said Bernie Winne, president and chief executive of Boston Firefighter’s Credit Union during the hearing.
Credit unions will look better than other originators when consumers use the new loan estimate and closing disclosures, he says.
Credit unions lost “misinformed consumers” to banks and nonbank mortgage lenders with the old disclosures, and that should be reversed with the new forms, declares Winne, who represented credit unions on a panel at the field hearing.
There are some complications that will affect institutions like BFCU, because they are smaller and have limited resources. Typically they depend on third parties to help with fulfillment and compliance. So CFPB needs to be mindful of unintended consequences because issues such as compliance cost could lead these lenders to discontinue certain product offerings, he says.
Title and settlement service agents find the new forms to be very readable and very understandable, American Land Title Association CEO Michelle Korsmo says. But changes like this come at a cost to its members and as it makes the investments needed to put this into effect, it wants CFPB to make sure the process is a positive one for both sellers and homebuyers.
A big issue for ALTA is that the form calls acquisition of an owner’s title policy “optional.” Title insurance is divided into two policies, one which protects the lender and the other protects the owner’s equity investment in the property if a defect is discovered. The former is required by the secondary market. The latter remains optional.
“Telling a consumer that owner’s title insurance is 'optional’ will mean that homebuyers may not be afforded the same protection that lenders receive from a title insurance policy,” she says.
ALTA got a big win when the so-called all-in APR was removed from the rule.
The new forms need to be implemented because the changes made by the Department of Housing and Urban Development to the good-faith estimate back in 2010 fail to work, says Marc Savitt, president of the National Association of Independent Housing Professionals during the audience participation segment and in an interview afterwards. These new forms are more consumer-friendly and should help with loan shopping.
Some good news for originators regarding the new form involved the part of the rule requiring the disclosure be made three days prior to closing. This only applies under circumstances such as a program change or the loan falls outside annual percentage rate tolerances, Savitt says.
The real test for the effectiveness of these new documents will come after they are implemented in August 2015. CFPB should be open to revising them as needed.
There is a sticking point; all originators, no matter what their business model is, must be able to disclose information to the consumer in the same way, he says. The National Association of Mortgage Brokers made a similar point in its comments about the forms.
NAIHP sent a letter to Cordray on Nov. 13 asking for a one year delay in implementing the qualified mortgage rule. The letter quotes CFPB’s own statement in the Federal Register saying the 3% fee cap in the rule could put mortgage brokers at a competitive disadvantage.
A one-year delay would give CFPB time to study the issue and craft a solution, Savitt says.