Learn How the New CFPB Loan Estimate and Closing Statement Will Make Home Buying Less Confusing
Getting a home loan is difficult. One of the worst parts about the loan process is understanding the details of loan offers. What's even worse is deciphering the disclosure statement, called a HUD-1, lenders are supposed to give borrowers before the closing.
Unfortunately, the HUD-1 is a mess. Even for a savvy consumer, the HUD-1 is maddeningly confusing. It appears to be designed to obscure information, rather than disclose it meaningfully. For example, the HUD-1 offers the outward appearance of a balance sheet, but it is not. There are various credits paid by the borrower, that one would think would correspond with credits due the seller, but do not. Also, the commissions section of the HUD-1 appears to have no correspondence with reality, and when buyers ask for explanations of this section of the HUD-1, no one at the lender seems willing or able to explain on what basis this charges are calculated.
Enter the CFPB, the Consumer Financial Protection Bureau, which seeks to make it easier for consumers to understand loan offers and closing statements.
Consumer Financial Protection Bureau (CFPB)
Formed in 2011, the CFPB is tasked with “…mak[ing] markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” The CFPB consolidates consumer protection responsibilities from other federal agencies, including the Federal Reserve, FTC, and HUD. Its jurisdiction is broad, and includes:
- Student loans and lenders
- Credit card issuers
- Securities firms
- Payday lenders
- Mortgage lenders and mortgage servicers
- Foreclosure relief services
- Collection agents
When the CFPB began its operations in early 2011, it began to accept accept suggestions and complaints from consumers about their experiences with financial services providers. Mortgages were one of the top sources of consumer ire. The CFPB focused on the disclosures given to homebuyers.
"When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal," CFPB director Richard Cordray said in a statement.
For the last 18 months, the CFPB has been researching and consumer testing two new disclosure firms that would replace the Truth In Lending Disclosure Statement (TIL), which is issued to borrowers with a loan offer, and the HUD-1 Settlement Statement. The two new documents are shorter than their predecessors, and are cleaner in design.
According the CFPB, both forms are designed to make estimates more reliable and to provide stark warnings about potential pitfalls. Borrowers are told about the risks involved with prepayment penalties and negative amortization.
Under CFPB rules, lenders would be required to give the Loan Estimate to borrowers within three business days of applying for a loan. The five-page Closing Disclosure would be provided at least three business days before the loan closes. This will help borrowers determine if lenders offered what they promised.
The first page of the proposed Loan Estimate includes the interest rates, monthly payments, loan amount and closing costs. It explains how the interest rates, payments, and loan amounts may change during the life of the loan. Most importantly, the Loan Estimate shows how high monthly payments could go. The form provides information about taxes, insurance, and other costs. The CFPB hopes borrowers will understand the total cost of the transaction.
The Closing Disclosure is meant to contain the information presented in the Loan Estimate in the same format so that borrowers can compare the two side-by-side. Today's TIL and HUD-1 forms were created at different times and present some of the same information in different formats, which makes comparisons difficult. A proposed rule would limit the situations where borrowers would pay more for settlement services than the amount stated on their Loan Estimate.
Other Mortgage Protections
The CFPB wants to prohibit terms that create a high risk for foreclosure, and certain fees. The CFPB proposes to ban:
- Balloon payment loans
- Prepayment penalties
- Fees for modifying loans
- Fees for payoff statements
The CFPB wants mortgage servicers to create clearer monthly statements, and set timelines for giving borrowers early warnings of interest rate changes on adjustable-rate loans. It also wants servicers to make better efforts to help distressed homeowners understand their options to foreclosure.