The following is an email I received today, which I have
edited down to the essentials:
“I just received a revised Good Faith
Estimate (GFE) and Truth in Lending (TIL)… Compared to the
original GFE, the new one has a new insurance charge of
$620…a lender rebate of $300 is now a charge of $112… my
appraisal fee is now $150 higher, and there is now a
“discount” charge of $187.”
I have been
receiving letters from consumers much like this for many
years, with the volume increasing noticeably following the
financial crisis. The central theme is that the
Government-mandated disclosures the consumer received after
they had applied for a mortgage was followed by a second,
usually by a third, and often by a fourth set of
disclosures. Each disclosure was different in one or more
respects from the preceding one, but an explanation of the
reasons for the changes was never part of the new
disclosure.
The applicant
who sent the email wanted an answer to one simple question:
were the changes justified or not? Without information that
could only be provided by the lender, I could not answer
that question. The disclosures failed in not requiring the
lender to identify the items on the disclosure that were
different from the previous version, and to explain why the
changes were made.
In the typical
case, the first disclosure is sent before the borrower’s
property is appraised, and before the loan terms (interest
rate and points) are locked. This usually results in a
second disclosure following receipt of the appraisal, a
third disclosure when the loan is locked, and less often a
fourth disclosure if something else changes.
The appraisal
usually requires a new disclosure because a property value
different than the one stipulated in the application will
change a large number of items on the disclosure. These can
include the loan amount and every charge that is based on
the loan amount including the mortgage payment, mortgage
insurance, and title insurance. These would generally fall
under the heading of “justified changes”.
Locking the
price usually requires a third disclosure because lenders
reset mortgage rates and points every day with the market.
Hence, it is unlikely that the rate and points will be the
same on the lock date as on the day the first disclosure was
issued. An adjustment to the market can also be viewed as a
“justified change,” but the magnitude of the adjustment may
or may not be justified.
The Good Faith
Estimate (GFE) disclosure referred to in the email will not
be around much longer. In November, the Consumer Financial
Protection Bureau (CFPB) released the final versions of new
disclosure forms that mortgage applicants will receive,
though the starting date was pushed forward to August 2015.
A new Loan
Estimate form, due within 3 days of submission of a loan
application, will replace two existing forms that overlapped
in ways confusing to borrowers: the GFE developed and
administered by HUD, and the Truth in Lending form (TIL)
developed and administered by the Federal Reserve.
The Loan
Estimate form is much better than the GFE and TIL. It is
shorter, inconsistencies have been removed, and the
terminology is clearer. In addition a new Settlement
Disclosure form, which must be provided at least 3 days
before closing, will replace the existing HUD1closing form.
A lot of work
went into the development of the forms, which included
extensive testing with consumers. CFPB’s web site provides
an enormous amount of information about the rule development
process, including the report of the consulting firm that
tested different versions of the disclosures. That report
alone runs 533 pages! The rule itself runs 1888 pages.
The
disclosures have multiple purposes, one of which – perhaps
the main one -- is to protect borrowers from unjustified
changes in the terms of a loan by the lender as the loan
process moves toward closing. The GFE and TIL did not do
that adequately because consumers receiving revised
disclosures were left completely in the dark as to why the
revisions were made. I regret to report that the new Loan
Estimate that will replace the GFE and TIL does no better.
Indeed, CFPB
seems not to have recognized the problem. At the top of page
1 of the Loan Estimate, it says “Save this Loan Estimate to
compare with your Closing Disclosure,” which ignores the
possibility that “this Loan Estimate” will be superseded by
another one. The Loan Estimate form was extensively tested
with consumers, but I could find no indication that changes
in the form had been tested at all.
While CFPB seems to have been myopic on this issue, it is also unique among Government regulatory agencies in its apparent openness. Its web site says that “Someone who thinks there’s a way to make disclosures clearer can work with us to start a trial that tests how well their idea works.” My colleague Jack Pritchard and I have developed a small addendum to the Loan Estimate where the lender will be obliged to list all items that have been changed from the previous version, and explain the reasons for the change. The addendum has been forwarded to CFPB, keep tuned.
Sections 2 and 3 of this series are at Will CFPB's New Disclosure Forms Help Borrowers Shop Effectively, and Will CFPB's New Disclosure Forms Help Borrowers Select the Best Type of Mortgage?
