Will CFPB's New Disclosure Forms Help Borrowers Shop Effectively?
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.
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.
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
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.
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.
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
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.
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.