First of several parts
The TILA-RESPA Integrated Disclosure Rule (TRID), in development by the Consumer Financial Protection Bureau (CFPB) for several years, became effective Oct. 3, 2015. One of its major purposes was to help borrowers understand and cope with the deluge of documents they must read and sign prior to closing on a mortgage.
This series of articles will consider how and where CFPB succeeded or fell short, and it will provide a complementary approach that should make it easier for borrowers to cope with the deluge.
Replacing irreconcilable documents
For decades, mortgage borrowers had to cope with irreconcilable disclosures mandated by HUD and the Federal Reserve. There was no way for a borrower to match the figures on the Good Faith Estimate disclosure (GFE, mandated by HUD) with those on the Truth in Lending disclosure (TIL, mandated by the Federal Reserve). One of the charges directed to the CFPB was to combine the GFE and TIL, which it has done in a new document called the Loan Estimate.
As with the disclosures it replaces, the Loan Estimate must be provided to the borrower within three business days following the submission of an application. While that document is far from perfect, as I’ll discuss in a later article in this series, it is far better than the disclosures it replaced.
New list of service providers
A new disclosure, provided to borrowers at the same time as the Loan Estimate, is a list of third-party services and service providers, divided into two groups: one group is services for which the borrower can shop, either the firms listed or other firms. The second group is services that must be purchased from the firms listed.
Of course, lenders who have a financial interest in a third-party service provider will list that provider in the second group, which makes a referral to that provider automatic.
Why is CFPB strengthening one of the least savory features of this market?
Providing borrowers with more time to study closing documents
TRID also has a new “Closing Disclosure” that replaces the old HUD-1 disclosure. While the form is much the same, the new disclosure must be received by the borrower at least three business days prior to closing. Previously, the borrower had only one day to study the documents received at closing. Some recent surveys indicate that more borrowers are reading the disclosures prior to the closing.
However, the CFPB controls only a few of the documents contained in the typical closing package; the remaining documents 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. TRID does not address this fundamental problem, which is a major focus of this series of articles. The key to making the package of closing documents manageable to borrowers is to classify them into different groups that call for different treatment.
This approach divides the document package the borrower receives into 4 groups. 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 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 be read and digested any time before the closing.
Future Use documents may become relevant in the future and should be accessible, 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.
-- To be continued next week. The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.