Q. I recently read that the Consumer Financial Protection Bureau is going to make the mortgage loan closing process more consumer friendly. Do you think it can?
A. I read the statement by the CFPB director, who correctly identified the closing problem: too many documents, many of which are badly-designed; insufficient time for borrowers to read them; and insufficient help in understanding them. But I wouldn't delay purchasing a home until CFPB makes the closing process consumer-friendly, because that isn't going to happen anytime soon -- if ever.
CFPB controls only a few of the documents in the closing package, the most important of which is its new Loan Estimate form, which becomes effective in August 2015. In some earlier articles, I described the forthcoming Loan Estimate as a major disappointment. It will be an improvement over the Good Faith Estimate and Truth in Lending forms that it replaces only in collapsing two poor disclosure documents into one poor disclosure document.
The remaining documents in closing packages are required by other Federal agencies, states, and the individual lender dealing with the borrower. Each entity is focused on its own disclosure, and how it fits into the total package is ignored. Whether CFPB can do anything about that is doubtful.
CFPB can require that the borrower have more time to read documents before closing, and the director indicates an intention to extend the borrower's right to receive the closing package from one day before closing, which is the rule now, to three days. However, extending the period without making the document package more manageable won't help many consumers. Few of them now take advantage of the one-day period.
In this article and the two that follow, I take a different approach to making the closing package more manageable to borrowers. This approach divides the document package the borrower receives into four groups that call for different treatment. Only one of them requires the borrower's careful scrutiny immediately before or at the closing. The categories are as follows:
• Junk documents are of no value or relevance to the borrower, so the objective should be to identify and sign them as quickly as possible.
• Educational documents contain information the borrower should know, and should therefore be read and digested any time before the closing.
• Future Use documents may become relevant at some time in the future and should be placed in a readily accessible folder, but no time need be expended on them at or before closing.
• Transactional documents contain the details of the mortgage loan, which probably changed during the loan processing period, requiring the borrower's full attention subject to the greatest time pressure.
A major reason for identifying the first three categories of documents is to reserve as much time and attention as possible for examining the fourth.
About half of the documents borrowers receive can be signed quickly and pushed aside because they do not require the borrower's attention. Most are merely acknowledgments that a disclosure that the law requires lenders to provide has in fact been provided. Here is my current junk list:
• Servicing Disclosure: You acknowledge being told that the lender who made your loan may not service it.
• Name Affidavit: You acknowledge that you are who you say you are.
• Mortgage/Deed of Trust: This is a long document that details the terms of the lien that the lender has on your property, and your obligations in connection with the lien, such as maintaining your homeowners insurance and paying the property taxes.
• ARM Rider: Repeats information in the note.
• Appraisal Report Disclosure: This document acknowledges receipt of the appraisal report.
• Attorney Selection Notice: This document acknowledges that you have been advised of your right to have an attorney at the closing.
• Authorization to Release Information: This document authorizes the lender to obtain information from third parties, such as banks and employers, for the purpose of verifying the information you have provided.
• Itemization of the Amount Financed: This document provides a breakdown of a useless number on the Truth in Lending form, which you can safely ignore. This and the item that follows will not appear in the package after August 2015.
• Affidavit Regarding Good Faith Estimate (GFE): This document requires you to acknowledge that the lender provided you with the GFE within the time period, and under the circumstances stipulated by the law.
• Fair Credit Reporting Act Notice: This document acknowledges that if you are delinquent or default on your payment, the lender will report it to a credit bureau.
• Equal Credit Opportunity Act Notice: This document requires you to acknowledge that you have been informed a) that the lender cannot discriminate against you on the basis of race, color, religion, and so on, and b) where to go to report violations.
• Tangible Net Benefit Worksheet: On a refinance where the lender is required by state law to assure that the borrower receives a net tangible benefit from the transaction, or elects to provide such assurance even if not required, the borrower must acknowledge receipt of the document attesting to the benefit.
• IRS Forms W-9 and 4506-T: These documents certify that you are a taxpayer, and authorize the lender to look at your tax returns.
• Escrow Account Waiver: In this document, borrowers who have paid lenders to waive the escrow requirement, acknowledge responsibility for making the payments themselves, and the consequences if they don't.
While no two document packages are exactly alike, you should have no trouble identifying junk documents in your package that are not in mine.
Next week: Educational and future use documents.
• Contact Jack Guttentag via his website at mtgprofessor.com.