January 2, 2014

The Consumer Financial Protection Bureau (CFPB) has developed two new disclosure forms that will replace three forms administered by HUD and the Federal Reserve. The adoption date was recently extended to August 2015, which hopefully will allow CFPB to make some needed improvements. 

 Last week’s article noted that the agency’s new Loan Estimate disclosure, while it is a lot better than the disclosures it replaces, will not protect borrowers from unjustified changes in the terms of a loan by the lender as the loan process moves toward closing. Last week I forwarded to CFPB a suggested addendum that would add such protection. 

This article asks whether the new disclosure will realize another CFPB objective, which is to help consumers shop among mortgage loan providers for the best deal. I recently wrote an article entitled “Can You Use the Good Faith Estimate (GFE) to Shop Mortgage Prices?” (The GFE is the HUD disclosure that will be replaced by the Loan Estimate). The answer was “no”, and the reasons apply as well to the new Loan Estimate disclosure.  

However, this is not a shortcoming of the new disclosure, because the difficulties borrowers face when trying to shop this market are not fixable by changing the disclosure rules alone. Certain market practices also need to be changed.   

The core problem that faces mortgage borrowers trying to shop the market is that it is close to impossible to obtain binding (“locked”) price quotes from different lenders at the same point in time. The prices quoted by mortgage lenders mean nothing until they are locked, lenders ordinarily will not lock until the property has been appraised, and each lender orders its own appraisal, which takes time. Meanwhile, mortgage prices are being reset every day with changes in the market. Disclosure rules in themselves cannot possibly help borrowers obtain binding price quotes from different lenders at the same time.  

The key to a fix is to make appraisals portable, meaning that they can be used with any number of lenders. With a portable appraisal, a mortgage shopper could begin the process by getting an appraisal, then apply to several lenders, with the appraisal included with each application. The borrower would invite each lender to make a firm offer at a specified date and time. The offer would specify the interest rate, loan fees, and lock fee, on the mortgage for which the shopper had applied. The borrower would accept one of the offers that day-- offers will lapse at the close of business -- and pay the lock fee of the selected lender.   

A lock fee will be necessary to discourage shoppers from walking away from deals when interest rates decline, and starting the process again with another group of lenders. But lock fees would be subject to the same competitive pressures as the other components of the mortgage price.

 Borrowers could get an appraisal now but could not use it to shop because it would not be acceptable to lenders, who require that it be issued in their name. Making appraisals portable requires that they be issued in the name of the consumer rather than in the name of the lender. Issuing appraisals in the name of a lender effectively makes it the property of that lender. This never made any sense. Since the consumer pays for the appraisal and owns or will own the property to which it applies, the appraisal should belong to the consumer, not to the lender.  

The objection to this proposal will be that the integrity of appraisals will be eroded as appraisal management companies compete for consumer clients by inflating values. But lenders will not be obliged to accept appraisals from companies they don’t respect, and in competing for consumer clients, appraisal firms will emphasize the acceptability of their appraisals to lenders.  

Indeed, the quality of appraisals probably will rise. Under the existing system, many appraisals come from companies in which the lender ordering the appraisal has a financial interest. That arrangement does not encourage appraisal integrity. With appraisals becoming the property of borrowers, that system will die out. 

This rule change should be accompanied by two new disclosures. One would provide a uniform offer sheet for lenders, making it relatively easy for shoppers to compare the different offers. The second would provide a uniform lock confirmation sent by the lender whose proposal is accepted. This one, however, would be identical to the new Loan Estimate disclosure, except that it would not be an estimate. 

I don’t know whether or not CFPB could implement this approach under its existing powers. But if it can’t, it should view its responsibilities for protecting consumers broadly enough to include proposing changes in rules that are clearly dysfunctional for consumers. 

Secgtions 1 and 3 of this series are at Will CFPB's New Disclosure Forms Protect Borrowers Against Unjustified Price Increases, and Will CFPB's New Disclosure Forms Help Borrowers Select the Best Type of Mortgage?