With the passage of the Dodd-Frank Act in 2010, the CFPB was charged with, among other things, the task of bringing greater transparency into the process of obtaining a home mortgage. After almost 18 months of research, review, and testing in more than a half-dozen major cities, CFPB recently released these two forms as a first step in fulfilling its task.
According to a Bureau release, "The estimates consumers receive when shopping for a mortgage do not present information in a way that emphasizes what matters. The forms often use jargon and are missing key information that consumers can only find later in the fine print, if at all. There is often no clear explanation of how things might change or what the risks are. All of this makes it difficult to compare one loan offer to another and find the best deal."
The proposed Loan Estimate is an easy-to-read 3 page document that will replace the two documents now required under the Truth in Lending Act (TILA) and the Real Estate Settlement and Procedures Act (RESPA). The new estimate is unquestionably easier to understand. A major improvement is that interest rates, monthly payments, the loan amount, and closing costs are all clearly spelled out on the first page. Graphically, it is a superior document to those currently in use. Moreover, the Loan Estimate provides clear warnings about features that would be unattractive to many consumers, e.g. prepayment penalties and negative amortization.
The Bureau had this to say about the current closing situation: "When consumers get to the closing table, there is a stack of paperwork to read. Often, this is paperwork that they are seeing for the first time. The consumer can feel trapped – it is not easy to object, ask questions, or walk away from the deal." Many could attest to the truth of that, and will find that simply requiring the closing disclosure statement to be provided at least three business days prior to close is itself a significant improvement.
Whether the proposed Closing Disclosure is all that much easier to read and understand is more open to debate. Inasmuch as it follows the general format of the standard HUD-1 closing statement, it is still liable to have a certain amount of MEGO effect. (MEGO = My Eyes Glaze Over) There is, though, an easily-read summary of any differences between the final closing and the estimate that was provided earlier.
There is still time to submit comments on these forms. Interested parties are encouraged to take a look at them on the Bureau's web site at: http://consumerfinance.gov/knowbeforeyouowe.
Although the forms will probably not be out before the first of the year, CFPB Director Richard Cordray has suggested that consumers who currently are, or are about to be, in the process of making loan applications might want to benefit from them now. He suggests that they download the sample forms and then ask their lender questions that would enable them to obtain the key information for their own loan.
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