Editor’s note: This is the second of a two-part series.
The first article of this series argued that information disclosed to borrowers after they apply for a loan cannot help borrowers to shop effectively. The new disclosure proposed by the Consumer Financial Protection Bureau (CFPB) will do no better in this regard than the existing Truth in Lending (TIL) and Good Faith Estimate (GFE) disclosures.
The proposed disclosure, however, will be far better than the TIL and GFE in helping borrowers select the right type of mortgage.
The focus of this article is what the new disclosure would or would not do to protect borrowers against two hazards to which they are exposed between the time they apply for the loan and the time the loan closes. The hazards are overcharges by third-party service providers, and overcharges by lenders.
Overcharges for services required in connection with the mortgage arise because the service providers are generally selected by the lender, or in some cases by the real estate agent. As a result, the selection process is aimed at generating benefits for the referrer rather than minimizing cost to the borrower.
The best policy for dealing with this problem is to require lenders to purchase all such services and include the prices in their own fees, but this approach has never acquired any political traction. Good disclosures are a second-best approach.
The proposed disclosure identifies the charges for which borrowers can shop on their own, and those for which they can’t shop, simplifying a similar provision in the 2010 revision of the GFE. A disclosure can do no more.
My only quibble with this effort is that CFPB cites appraisal fees and credit reporting fees as examples of required services for which borrowers can not shop. Because these services are provided by private firms, there could well be changes in market practice that would allow borrowers to shop for them. Better examples are recording and tax service fees, which are set by local governments and cannot ever be negotiated.
The second and more important hazard to which mortgage borrowers are exposed after they apply is pricing abuse by the lender. The CFPB disclosure does a good job of warning borrowers about what might happen to the loan terms after the loan is closed, but it leaves borrowers entirely in the dark regarding what can happen to them before the closing.
The key problem about which the proposed disclosure does not warn borrowers is that the interest rate and origination fees shown on the disclosure are not binding on the lender until the lender locks them and issues a lock confirmation statement. The disclosure shows the prices that the borrower would pay if the loan were locked the day the disclosure is issued, which very few are.
The great majority of borrowers will be locked at some future date, when the price is almost certain to be different. Prices are reset every morning, and sometimes during the day.
The proposed disclosure, like the GFE, shows an expiration date. The GFE at least tells the borrower that "After this time, the interest rate, some of your Loan Origination Charges, and the monthly payment … can change until you lock your interest rate." The new disclosure has no such warning.
Worse, page 2 of the disclosure shows the lender’s origination fee with the notation, "This fee cannot change." Wrong! The fee, as well as the rate on the first disclosure received by the borrower, can and probably will change because they are not locked when the disclosure is received. When the loan is locked, the lender will issue a new disclosure and the rate and fees shown on that disclosure cannot be changed.
The concept of "expiration" does not belong on the disclosure because in most cases there is nothing to expire. The date that lenders typically place on the GFE is the day the disclosure is issued because prices are reset the following day.
Some borrowers may receive the GFE through the Internet on that day, but most get it in the mail and find that the stated prices expired yesterday or the day before. That is not very helpful. The new disclosure would continue this inanity.
On the bright side, the proposed disclosure is a work in progress, with the final version not due until next year. Hopefully, CFPB will eliminate the expiration date and replace all references to lender price commitments with warnings about the lack of commitment.
That will open the door to additional disclosures borrowers should have in connection with the locking process. These include the fees required to lock, and the conditions under which such fees are refundable.