Buying a house is often a stressful event. Getting a mortgage loan is sometimes even worse, especially when you don’t fully understand what the entire process will cost, or even how it works.
In an effort to reduce consumer confusion as well as the reams of paper involved in a real estate settlement transaction, the new Consumer Financial Protection Bureau (CFPB) has proposed rules aimed at simplifying and improving the disclosure forms required for mortgage transactions.
Using the name Know Before You Owe, the bureau proposes combining several forms into two: a loan estimate and a closing disclosure.
Currently — and going back more than half a century — two disclosure forms are required to be used. One is a Truth in Lending Act form — developed primarily by the Federal Reserve Board — and the other is the HUD-1 settlement statement prepared under the direction of the Department of Housing and Urban Development.
When Congress enacted what is referred to as the Dodd-Frank Act, the bureau was created and one of its tasks was to combine these two forms.
The loan estimate form would be given to consumers not more than three days after they make application for a mortgage loan. This would replace the good-faith estimate currently in use. It spells out — in simple English — most, if not all, of the features and conditions of the proposed loan.
For example, if you are considering an adjustable rate mortgage (ARM), not only would the form give you your monthly costs today, but it also would project the monthly payment as the mortgage adjusts over the remainder of the loan. This is important; many people do not understand that an ARM’s interest rate can over time increase significantly. Currently, interest rates for ARMs are hovering in the low 3s. But if the overall cap is, for example, 8 percent, your monthly payments in just a couple of years may be so high that you can no longer afford them.
The second form is the closing disclosure, which would replace the HUD-1 settlement statement. It would provide the homebuyer with the exact amount of money required to close the transaction. If there is a prepayment penalty or a balloon payment, it would state this on the front page. Lenders would be required to give this form to their borrowers at least three business days before settlement takes place. If there were changes after the disclosure were given, in most cases, the lender would have to provide a revised statement, again giving the consumer three business days to review.
I suspect this provision would be vigorously contested by the lending community. Typically, especially in hot markets or when interest rates are historically low, lenders have trouble getting their act together even on the date of a scheduled settlement, let alone three days in advance. And sellers who suddenly learn that their settlement has to be postponed for at least three more days would be up in arms, especially if they need the sales proceeds to buy another house.
The practice in the industry today is that settlement attorneys and title companies are required to prepare and give to buyers the HUD-1, while lenders are required to provide the Truth in Lending disclosure. CFPB is proposing alternatives for consideration by the public: One is for the lender to provide the closing disclosure form to their borrower, while the other is to allow this to be given by the settlement agent. However, even if this second option is finally adopted, if there are errors in the form, the lender would still be responsible.
“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,” said Richard Cordray, director of the bureau. “Our proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home.”
Years ago, the mortgage process was relatively easy. You signed three documents: a promissory note, a deed of trust (the mortgage document) and a simple settlement statement. Today, a homebuyer (or refinancer) must sign dozens of documents — such as five Truth in Lending statements, name affidavit, power of attorney, clerical error affidavit, appraisal notice, tax authorization form, flood certification, etc.
And all too often, settlement agents rush their client through the process, saying “just sign here, it’s all customary.”
The proposed forms would not go into effect this year. But if and when they do, consumers would have considerably more information about their homebuying process than is currently available.
Whether they bother to read and digest the information is a question for another day. Consumers are encouraged to comment on the proposals by November 6 and they can be found online simply by typing Know Before You Owe.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.