Even with new forms, borrowers must protect themselves

The Consumer Financial Protection Bureau (CFPB) recently debuted their new mortgage disclosure forms, sending economists and pundits into furious action picking out all the attendant nits.

Without a doubt, the new disclosures are vast improvements over the previous Department of Housing and Urban Development (HUD) forms. They are simpler, clearer and pack a stronger regulatory punch. However, industry experts agree the forms still give lenders the upper hand over borrowers.

The CFPB contends the new forms and related rules:

• improve borrower understanding;
• allow for comparison shopping; and
• limit surprise costs at closing.

When these purported benefits were announced, the New York Times promptly published an editorial revealing their shortfalls. Chief among their complaint was that lenders are still able to sneak hidden fees in that may go unnoticed in the closing disclosure (the CFPB’s replacement for the HUD-1). The Times suggests the CFPB require an automatic three-business-day extension each time any change is made to the closing disclosure.

The Huffington Post also recently chimed in with an editorial arguing these changes haven’t made it any easier to comparison shop. HuffPo doesn’t blame the forms themselves. Instead, they point out a long-standing “standard practice” that tips the balance of power in the lender’s favor: lenders won’t lock a loan rate until they receive a final appraisal. Despite the fact that the borrower pays for the appraisal, the lender orders it, in his name, using an “independent” third party appraisal management company (AMC).

HuffPo’s solution seems simple: mandate portable appraisals. The borrower orders his or her own appraisal and brings it along with them to comparison shop. Lenders are given the opportunity after qualifying the borrower and accepting the appraisal to make an offer, at which point the borrower chooses the best interest rate and terms.

Changing the current procedure is one way to go about it. Of course, it will be a steep up-hill battle, considering how deeply entrenched these processes are. For the moment, using portable appraisals means asking lenders to voluntarily concede power over the deal — not going to happen.

This is why we are and always have been advocates of double apping. The only way to compete with lenders is for borrowers to beat them at their own game. Currently, lenders take advantage of the fact that they are not legally under contract with a borrower until the moment the loan is funded. Loan lock agreements are a possible exception to this rule, but they are fraught with contractual loopholes as well (loan locks “lock” the interest rate, not the closing costs).

By double apping, the borrower is also able to take advantage of their freedom from contractual obligation. If loan terms are changed at the last minute or closing costs don’t add up as expected, the borrower can change lenders without the fear of losing their dream home.

Of course, there may be some additional costs associated with double apping. As HuffPo points out, appraisals are typically non-transferable and usually paid for by the borrower. Thus, the borrower who double apps may be on the hook for additional appraisal costs. But, the bargaining power achieved by submitting multiple loan applications and the potential costs saved by obtaining the lowest rate and closing costs possible is likely worth the additional few hundred dollars.

The lesson here is that the CFPB is working hard to write as much protection as possible into the mortgage loan process. However, the borrower is still responsible for getting the best deal they can. For now, that means savvy shopping with a well-informed agent to guide the way.

Have any tips for borrowers looking to get a fair shake from lenders? Let us know in the comments section below.