Effort to improve transparency in mortgage forms has more pros than cons

A new set of rules for mortgage brokers will take effect this month, and while the rules are aimed at transparency between lenders and consumers, some say it may slow down the process.

The Truth in Lending Act (TILA) has been around since 1968. It was designed to safeguard consumers by requiring full disclosure of the terms and conditions of finance charges in credit transactions. It has been amended several times over the years, and this month, another rule will take effect.

In 2013, the Consumer Financial Protection Bureau (CFPB) integrated the Real Estate Settlement Procedures Act (RESPA) and TILA disclosures and regulations. Now, any transaction involving a mortgage will use new CFPB disclosure forms. The new forms were originally supposed to be implemented in August of this year, but it was pushed back until Oct. 3.

Put simply, the new disclosure forms are meant to help a consumer more easily understand all the costs and fees involved in obtaining a mortgage and closing on a home, make it easier to compare multiple loan offers, and avoid being hit with any last-minute charges.

“What the government has done is a really smart thing to do, which is to take away the surprise element,” said Melissa Cohn, a mortgage broker with MC Home Loans.“The consumer at a closing will get what is bargained for. If you just hand someone a document an hour before a closing and there’s another fee on it – it puts the consumer in an awkward position. And it’s a position they should never be put in.”

 

Cohn says one of the biggest takeaways from the new rules, are that the TILA document and Good Faith Estimate (GFE)documents are now combined into one document, instead of being separate and difficult-to-understand forms.

“It’s funny math all basically done by a computer, and doesn’t give any common sense to the consumer,” she said. “The new form is basically a worksheet of what you’ll have to pay – appraisal fee, closing, fees, mansion tax – whatever it may be, is presented in a very readable and consumer-friendly format, which I think is an incredible plus.”

One of the biggest changes with the new rules, is that both the TRID and good faith documents have to be presented in their final form three days prior to closing, meaning there will be no hidden fees showing up at a closing. Before the rule went into effect, the GFE document wasn’t signed until the day of closing.

However, a downside of the new disclosure rules could mean that a closing could get prolonged if something came up last minute, and the forms had to be changed and sent again with a new three-day period tacked on.

“The good thing is, once you get to the closing table, it should be a much better experience,” said Cohn. “In my eyes, it’s a real plus for the consumer, a plus for me as a mortgage banker, because it makes my job of helping my borrower understand what their costs are much easier today, and they’re comforted by the fact that there aren’t hidden fees at closing.”

The CFPB is also considering a clarification to the new disclosure rules dealing specifically with co-ops, which the new rules did not specify were included as part of the changes.

Co-ops have traditionally been considered real estate under TILA and RESPA, but the CFPB did not specify whether co-ops would be considered real estate under the new rule. Sales of co-ops have reportedly been slowed since the new rules were announced, because of confusion over which type of disclosure form should be used.

Congresswoman Carolyn Maloney of New York questioned CFPB director Richard Cordray during a hearing last week about the co-op issue, and he said they will take the concerns into consideration and work to “get it right.”

Transparency has become a major focus after predatory lending practices led to a subprime mortgage crisis, which coincided with the economic downturn of 2008-2009.

And even now, those seeking a loan are discriminated against based on their race, according to a recent working paper from the National Bureau of Economic Research. That study found that between 2004-2008, African Americans were 54 percent more likely to be charged high interest rates on their mortgages, according to a Washington Post article from December of 2014.

The study found that people in essentially the same financial situations got different mortgages depending on the color of their skin. The authors of the study estimated that, all else being equal, black Americans were 7.7 percentage points more likely to have a high-interest mortgage, a 54 percent increased risk, while Latinos were 6.2 points (45 percent) more likely to have a high-interest mortgage. Asian Americans were 1 percentage point (7 percent) more likely to have a high-interest mortgage.

The authors found that most of the people were concentrated in high-poverty neighborhoods, and especially in places where the residents were less educated.

On the residential real estate brokerage side, agents see the changes a positive addition to the process. Lee Williams, a salesperson with real estate brokerage firm Level Group, sees there being an adjustment period to adapt to the new rules, but after that, smooth sailing.“There is going to be a slight delay with the new procedures,” he said. “Whenever there is any change it takes time for all those involved to become accustomed to the new rules.”

However, as most agents will tell you, a client’s needs and interests come first, and these new disclosure rules aimed at transparency do just that.

“In the end the customer will have the full list of fees and expenses for closing,” said Williams. “This is only going to be of benefit for all concerned. No one likes surprises at the closing table. Anything that makes this process more transparent for them will only help the consumer and our industry in the long run.”

Veteran broker Lawrence Rich, who works for Brown Harris Stevens, compared the three-day wait period to getting a marriage license and having to wait before having the ceremony. “When something’s new everyone complains, and then they just adapt,” said Rich. “It’s just part of the process. It could cause problems getting everyone together at the same time, but I don’t think it’s a bad thing, because people always say they don’t know what they’re paying for with all these fees.”