If you've purchased, refinanced, or built a home in the past three years, odds are that you signed a slew of paperwork during your mortgage process. Hopefully, you had a lender who explained all of the details and answered any questions you had in order to make sure that you fully understood your mortgage terms and options. I can't count the number of people who have commented, "This is a lot more paperwork than the last time we did this." In late 2015, the Consumer Financial Protection Bureau (CFPB) introduced two new forms, the Loan Estimate (LE) and Closing Disclosure (CD), which went into effect at that time.
Like most new rules, regulations, and forms, there were some things they got right, some things they got wrong, and some things that have room for improvement. From both a borrower and lender's perspective, here is some background info as well as my thoughts on the current status and changes that should be considered.
Purpose
An explanation of an LE from the CFPB website is here: "The Loan Estimate tells you important details about the loan you have requested. The Lender must provide you a Loan Estimate within three business days of receiving your application." This form was a solid attempt to combine what was previous two separate forms (Good Faith Estimate and Truth-in-Lending Disclosure). Anytime you can take multiple forms and combine them into one, I'm a fan. The CFPB's attempt at putting the bulk of the key loan information on one form was pretty solid. I say they got that part right.
Layout
The layout of the LE and CD are much cleaner and neater than the prior forms. When you can get rid of fine print (which no one reads anyway) you're heading in the right direction. The CFPB used large bold font to highlight key elements of the loan such as amount, interest rate, payment amounts, closing costs, etc. There is a good amount of "white space" on the form so these figures are easy to read on page 1. Page 2 becomes a bit more cluttered but there you are looking at a lot of figures and it is still rather easy to sort through with a little time and explanation. Plus the fees are grouped well by category. The layout gets a pass from me.
Disclosure of Fees
This is where from a borrower viewpoint it gets confusing and from a lender viewpoint it becomes frustrating. These are real numbers from an actual loan of a borrower who did not have a mortgage on their home per the guidelines as laid out by the CFPB.
Loan Amount: $196,000.00
Closing Costs: $ 4,511.83
Cash to Borr.: $193,350.40
How's your math? 196,000 - 4,511.83 = $191,488.17 NOT $193,350.40
So now I have to explain to a borrower that I need you to sign this form which says your closing costs are over $4,500 when I'm telling you that they are actually under $2,700. I don't blame the borrower for being confused by this math and I try to hide my frustration for this 'new and improved' form.
If you're in banking or finance, you know that the difference in these amounts is the homeowner's insurance and property taxes. And while I do agree that these amounts should be disclosed, lumping them in with closing costs tied directly to a loan when they are not being collected/paid as part of the closing is confusing to borrowers and makes lenders appear untrustworthy.
Bank & Attorney Fees
The CFPB also attempted to ensure that borrowers would not be misled by unscrupulous banks or lenders trying to quote closing costs too low in an effort to get borrowers to feel locked into a mortgage. While I fully agree with the intent of this rule, the actual effects of it create some issues.
As a lender, I must tell you exactly how much the bank's fees will be. That's the easy part. Most bank's fees are either a flat figure or percentage based on the loan amount. We are not allowed to change them regardless of how many times we issue an LE, a CD, or recalculate figures for a borrower. They are the same and we are required to get them accurate, which is rather simple for any decent lender to do.
Next, we get to the attorney's fees. Most attorneys have a typical fee that they charge for a loan closing. I am biased towards our local attorneys who charge an attorney fee and only break out the title insurance (which is a separate line item anyway). I find it misleading to borrowers for attorneys to tell clients that their fee is $300 and then proceed to nickel, dime, and quarter them to death with other various fees ranging from $20 - $100 such as copy, title search, doc prep, and others that one would consider part of a typical closing.
But there is a also a rule which requires banks to disclose an attorney's fees with a certain degree of accuracy if they are one of regular "service providers." Again, for the attorneys I am fortunate enough to work with, this is no major issue. We rarely have something off the wall which causes an issue or impacts the costs. However, at times there is a title issue, or a logistical issue, which may require a significant amount more time from an attorney. When this is the case, I have no issue whatsoever with them charging the borrower more to compensate them for their time. However, with the rule in place, if that fee exceeds the allowable range of the original fee disclosed, the Bank not the Borrower, is the one on the hook for the difference. Again, I am biased on that. But does that sound fair that something the bank had nothing to do with is now going to be expensed to them? I didn't think so either.
I'm all for the bank disclosing its fees with 100% accuracy, but there is much room for improvement when it's up to us to disclose a fee that could change for very justifiable reasons.
Appraisal Fees
Appraisals have undergone a significant amount of change in the past 3-5 years as well. Banks nor borrowers are allowed to select their appraiser any longer. This could be someone who's been to your house 100 times, lives down the street, and has a vast knowledge of the market value in your neighborhood, but your order will come from a rotation list which banks used based on market areas. Again, the intent of the rule - to prevent shady deals and inflated appraisals - has a good heart. But the execution is imperfect. Appraisers no longer have any ability or need to market their business since it is based on a rotation anyway.
This brings me to my next point concerning their fees. Similar to attorney fees, banks are required to disclose the appraisal fee with a high degree of accuracy. However, for all practical purposes, when the bank gives you an LE at application, we do not know who will be next on the appraisal list once you decide to proceed with your mortgage loan. The appraiser could change, which also means that the fee could change. And with the CFPB, guess who is left paying that expense again.
Some banks have found a way to prevent this from happening by using appraisal management companies. In my personal opinion, this is horrible for borrowers and appraisers. The fee borrowers are charged is significantly higher while the compensation the appraiser receives is significantly lower. Why? Because now we have a middle man who "manages" the appraisal process and makes a cut of the profits. There is so much improvement needed here, I'm just going to call this one wrong.
Rules and regulations are almost always put in place to prevent negative, cruel, or malice behavior. However, they should be balanced with common sense, practicality, and be reviewed by parties on all sides of a transaction. I believe that the CFPB was on the right track when they came up with the LE and CD. But I think they listened to too many consumer activists and not enough actual consumers to find out what was really needed in the market at this time. Hopefully, changes will be made to make the disclosures more accurate, useful, and fair for both borrowers and lenders in the future.
Like most new rules, regulations, and forms, there were some things they got right, some things they got wrong, and some things that have room for improvement. From both a borrower and lender's perspective, here is some background info as well as my thoughts on the current status and changes that should be considered.
Purpose
An explanation of an LE from the CFPB website is here: "The Loan Estimate tells you important details about the loan you have requested. The Lender must provide you a Loan Estimate within three business days of receiving your application." This form was a solid attempt to combine what was previous two separate forms (Good Faith Estimate and Truth-in-Lending Disclosure). Anytime you can take multiple forms and combine them into one, I'm a fan. The CFPB's attempt at putting the bulk of the key loan information on one form was pretty solid. I say they got that part right.
Layout
The layout of the LE and CD are much cleaner and neater than the prior forms. When you can get rid of fine print (which no one reads anyway) you're heading in the right direction. The CFPB used large bold font to highlight key elements of the loan such as amount, interest rate, payment amounts, closing costs, etc. There is a good amount of "white space" on the form so these figures are easy to read on page 1. Page 2 becomes a bit more cluttered but there you are looking at a lot of figures and it is still rather easy to sort through with a little time and explanation. Plus the fees are grouped well by category. The layout gets a pass from me.
Disclosure of Fees
This is where from a borrower viewpoint it gets confusing and from a lender viewpoint it becomes frustrating. These are real numbers from an actual loan of a borrower who did not have a mortgage on their home per the guidelines as laid out by the CFPB.
Loan Amount: $196,000.00
Closing Costs: $ 4,511.83
Cash to Borr.: $193,350.40
How's your math? 196,000 - 4,511.83 = $191,488.17 NOT $193,350.40
So now I have to explain to a borrower that I need you to sign this form which says your closing costs are over $4,500 when I'm telling you that they are actually under $2,700. I don't blame the borrower for being confused by this math and I try to hide my frustration for this 'new and improved' form.
If you're in banking or finance, you know that the difference in these amounts is the homeowner's insurance and property taxes. And while I do agree that these amounts should be disclosed, lumping them in with closing costs tied directly to a loan when they are not being collected/paid as part of the closing is confusing to borrowers and makes lenders appear untrustworthy.
Bank & Attorney Fees
The CFPB also attempted to ensure that borrowers would not be misled by unscrupulous banks or lenders trying to quote closing costs too low in an effort to get borrowers to feel locked into a mortgage. While I fully agree with the intent of this rule, the actual effects of it create some issues.
As a lender, I must tell you exactly how much the bank's fees will be. That's the easy part. Most bank's fees are either a flat figure or percentage based on the loan amount. We are not allowed to change them regardless of how many times we issue an LE, a CD, or recalculate figures for a borrower. They are the same and we are required to get them accurate, which is rather simple for any decent lender to do.
Next, we get to the attorney's fees. Most attorneys have a typical fee that they charge for a loan closing. I am biased towards our local attorneys who charge an attorney fee and only break out the title insurance (which is a separate line item anyway). I find it misleading to borrowers for attorneys to tell clients that their fee is $300 and then proceed to nickel, dime, and quarter them to death with other various fees ranging from $20 - $100 such as copy, title search, doc prep, and others that one would consider part of a typical closing.
But there is a also a rule which requires banks to disclose an attorney's fees with a certain degree of accuracy if they are one of regular "service providers." Again, for the attorneys I am fortunate enough to work with, this is no major issue. We rarely have something off the wall which causes an issue or impacts the costs. However, at times there is a title issue, or a logistical issue, which may require a significant amount more time from an attorney. When this is the case, I have no issue whatsoever with them charging the borrower more to compensate them for their time. However, with the rule in place, if that fee exceeds the allowable range of the original fee disclosed, the Bank not the Borrower, is the one on the hook for the difference. Again, I am biased on that. But does that sound fair that something the bank had nothing to do with is now going to be expensed to them? I didn't think so either.
I'm all for the bank disclosing its fees with 100% accuracy, but there is much room for improvement when it's up to us to disclose a fee that could change for very justifiable reasons.
Appraisal Fees
Appraisals have undergone a significant amount of change in the past 3-5 years as well. Banks nor borrowers are allowed to select their appraiser any longer. This could be someone who's been to your house 100 times, lives down the street, and has a vast knowledge of the market value in your neighborhood, but your order will come from a rotation list which banks used based on market areas. Again, the intent of the rule - to prevent shady deals and inflated appraisals - has a good heart. But the execution is imperfect. Appraisers no longer have any ability or need to market their business since it is based on a rotation anyway.
This brings me to my next point concerning their fees. Similar to attorney fees, banks are required to disclose the appraisal fee with a high degree of accuracy. However, for all practical purposes, when the bank gives you an LE at application, we do not know who will be next on the appraisal list once you decide to proceed with your mortgage loan. The appraiser could change, which also means that the fee could change. And with the CFPB, guess who is left paying that expense again.
Some banks have found a way to prevent this from happening by using appraisal management companies. In my personal opinion, this is horrible for borrowers and appraisers. The fee borrowers are charged is significantly higher while the compensation the appraiser receives is significantly lower. Why? Because now we have a middle man who "manages" the appraisal process and makes a cut of the profits. There is so much improvement needed here, I'm just going to call this one wrong.
Rules and regulations are almost always put in place to prevent negative, cruel, or malice behavior. However, they should be balanced with common sense, practicality, and be reviewed by parties on all sides of a transaction. I believe that the CFPB was on the right track when they came up with the LE and CD. But I think they listened to too many consumer activists and not enough actual consumers to find out what was really needed in the market at this time. Hopefully, changes will be made to make the disclosures more accurate, useful, and fair for both borrowers and lenders in the future.
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