We dissect the CFPB’s new forms, offer a solution to their shortcomings and provide some insight from the BRE Assistant Commissioner.
This article was updated June 19, 2015 to reflect the newly proposed implementation date.
New forms clarify, simplify
When it comes to real estate forms, the old acronym always applies: Keep It Simple Stupid (KISS).
The newly released loan estimate and closing disclosure forms from the Consumer Financial Protection Bureau (CFPB) appear to significantly simplify the mortgage lending process for homebuyers. Although the forms are final, they are not to be used until October 1, 2015.
Editor’s note: Prior to June 2015, the implementation date for the new disclosure rules was August 1, 2015. The CFPB proposed pushing back the date to October 1, 2015, giving the Bureau time to fix an unknown administrative error. Read more here.
The loan estimate form combines and replaces the early Truth-in-Lending statement and the Good Faith Estimate (GFE). This form is delivered by the lender to the homebuyer within three business days of submitting a mortgage application.
The loan estimate form provides the mortgage terms and details quoted by lenders, to assist homebuyers as they shop and compare different mortgages.
The closing disclosure combines and replaces the final Truth-in-Lending statement and the HUD-1 Settlement Statement. This form is provided within three business days of loan closing, and summarizes the “final” mortgage terms and details.
Combined, these two forms improve homebuyer understanding of loan terms and increase the ease of comparing loan products, according to a study conducted by the CFPB. Lender competition for their homebuyer’s financing needs is the underlying purpose of this comparison shopping.
The new disclosure forms remove many redundancies found in the multiple forms currently required by overlapping federal and state mortgage laws.
Obtaining a mortgage involves a staggering amount of paperwork; reducing the sheer volume of disclosures gives homebuyers a chance to read (and actually understand) what they’re signing. More importantly for our readers, uniformity across the industry helps buyer’s agents quickly discern which lender’s offer is best, separating the proverbial wheat from the chaff.
Double app-ing for protection
Not everyone agrees, however, that the CFPB’s best efforts are good enough. A recent editorial from the New York Times’ Editorial Board contends the new disclosures are disappointing. The Editorial Board concludes the reimagined form falls short of providing a clear picture of total closing costs.
According to the Times:
“The final rule limits but does not eliminate the lenders’ ability to introduce last-minute changes at the closing table. That’s too lenient. Lenders must be held to their promises.”
They argue lenders ought to be required to give homebuyers an automatic three-day review period whenever any loan terms are changed.
Although a compulsory review period triggered by changes to the loan docs ostensibly provides greater homebuyer protection, some argue there is a free-market solution to the problem.
Lenders typically get away with manipulating closing costs in their favor because there is an asymmetry of power between the lender and the homebuyer. However, the buyer can balance this asymmetry if they submit more than one loan application, a prudent procedure commonly known as “double app-ing.”
When a lender inflates costs at the last minute, as they often do, it is taking advantage of the fact that a contract has not been entered into to bind them to their prior promises until the loan is finally funded. Homebuyers can enjoy the same freedom to make a last minute change, but they may only create this defensive opportunity by having a backup lender — an opportunity many homebuyers are not made aware of by their transaction agent.
Since the homebuyer nearly always has a real estate licensee as their professional counsel, called a buyer’s agent, the responsibility falls on the buyer’s agent’s shoulders to inform their client of this protective strategy. Until buyer’s agents begin recommending double app-ing as a best practice for their client, or until the CFPB gets their mortgage loan regulations air tight, homebuyer’s will continue to be duped by the always shrewd and ever slippery mortgage lender.
In sync with CalBRE
In the meantime, California mortgage loan brokers are stuck in forms purgatory. The CFPB’s new forms are ready, but may not be used until the new start date of October 1, 2015. The Bureau of Real Estate (BRE) requires the use of their mortgage disclosures in conjunction with federally mandated forms; they currently are designed as a companion to HUD’s Good Faith Estimate (GFE). [See first tuesday Form 204, 204-1 and 204-2]
We got in touch with Tom Pool, Assistant Commissioner at the BRE, and he shed some light on the situation. Mr. Pool was very informative, as always.
When originating a mortgage loan secured by any type of real estate, the BRE previously required the use of its form RE 882, Mortgage Loan Disclosure Statement (traditional) (MLDS). This form was created, according to Mr. Pool, well before HUD’s GFE came into existence and was required by the BRE to better inform and protect California homebuyers at the time. [See first tuesday Form 204]
After the advent and federal requirement of the GFE by HUD, the BRE created form RE 883 to be used in conjunction with HUD’s then new form. The RE 883 is specifically designed for SFR sales; there are subsequent forms in the series for loans secured by other types of real estate. [See first tuesday Form 204-1]
When we asked Assistant Commissioner Pool about the preferred procedure for early adopters of the CFPB’s forms, he made clear that California’s mortgage loan disclosure statement is still required by California state law. Since RE 883 has yet to be updated to jibe with the CFPBs new forms, brokers using the new Federal “know before you owe” documents will need to do so with the traditional MLDS form RE 882 (not RE 883). [See first tuesday Form 204]
Mr. Pool noted information regarding the procedure will likely be forthcoming in a future BRE Bulletin. However, since the CFPB’s forms are so newly minted, the BRE is taking a “wait and see” approach before investing their resources in the development of a replacement for RE 883. [See first tuesday Form 204-1]
Assistant Commissioner Pool had no comment with regards to first tuesday’s inquiry about the quality or transparency of the CFPB’s new forms.