Guest Author Scott Stevenson, President of Northwest Title.
I’ve been celebrating that new form smell over at Northwest Title. Finally – finally! – a piece of legislation has prompted a change that will benefit consumers. The Dodd–Frank Wall Street Reform and Consumer Protection Act required several changes, one of which included the creation of the Consumer Financial Protection Bureau.
The bureau’s primary goal is to create transparency for consumers to make sure they understand exactly what they’re getting— and what it’s costing them — when they’re borrowing funds. One of the most important components of the new disclosure will help consumers understand the true cost of the loan terms and rate they obtain.
Lenders will be obligated to explain loan terms in more detail, which should lead to better-informed consumers and (hopefully) a reduced risk of default. The impact on our industry is primarily in making sure we comply with the CFPB requirements. There will be some expense involved, but the uniformity it will bring to all lenders is good for consumers.
Thanks to these disclosure requirements, consumers may finally see clear and more complete information that will help them make better decisions when choosing a mortgage lender. The new form, which will combine the Truth in Lending Act disclosure with the Department of Housing and Urban Development’s Good Faith Estimate (HUD-GFE), has already generated a lot of interest. The CFPB introduced two prototypes that received a whopping 13,000 comments from consumers and industry professionals.
After analyzing the comments and feedback, the CFPB has now entered the second phase of the process, focusing specifically on explaining closing costs to consumers more clearly. The CFPB has introduced two designs, Redbud and Dogwood, incorporating the analysis from round one. They are seeking feedback on how well the two forms communicate the information to consumers.
There are some very helpful sections to the forms. One section that I particularly like is the “loan estimate” section, which projects payments over time. The other section that should help consumers make more informed decisions is the “cautions” section that warns the consumer about features of the loan that could cause payments to increase (like an adjustable rate).
The big question, of course, is whether all of these improvements to the disclosures will actually make a difference in the way consumers shop for a lender. My view? Probably not. People want to own homes, and they’ll stick with the first lender who tells them they can make it happen. And, even with the improvements, there’s still a lot of detail and complexity to the form .
Even if consumers don’t do a lot of homework when they’re finding a lender, the new CFPB-compliant forms will help consumers understand the terms of their loan repayment and whether or not there are any prepayment penalties or other unusual elements to the loan. The forms also make it more likely that consumers will engage in meaningful dialogue with loan officers and seek more clarification before committing.