The following is an email I received today, which I have edited down to the essentials:
I just received a revised Good Faith Estimate (GFE) and Truth in Lending (TIL)... Compared to the original GFE, the new one has a new insurance charge of $620... A lender rebate of $300 is now a charge of $112... My appraisal fee is now $150 higher, and there is now a "discount" charge of $187.
I have been receiving letters from consumers much like this for many years, with the volume increasing noticeably following the financial crisis. The central theme is that the Government-mandated disclosures the consumer received after they had applied for a mortgage was followed by a second, usually by a third and often by a fourth set of disclosures. Each disclosure was different in one or more respects from the preceding one, but an explanation of the reasons for the changes was never part of the new disclosure.
The applicant who sent the email wanted an answer to one simple question: Were the changes justified or not? Without information that could only be provided by the lender, I could not answer that question. The disclosures failed in not requiring the lender to identify the items on the disclosure that were different from the previous version, and to explain why the changes were made.
In the typical case, the first disclosure is sent before the borrower's property is appraised, and before the loan terms (interest rate and points) are locked. This usually results in a second disclosure following receipt of the appraisal, a third disclosure when the loan is locked, and less often a fourth disclosure if something else changes.
The appraisal usually requires a new disclosure because a property value that is different than the one stipulated in the application will change a large number of items on the disclosure. These can include the loan amount, and every charge that is based on the loan amount including the mortgage payment, mortgage insurance and title insurance. These would generally fall under the heading of "justified changes".
Locking the price usually requires a third disclosure because lenders reset mortgage rates and points every day with the market. Hence, it is unlikely that the rate and points will be the same on the lock date as on the day the first disclosure was issued. An adjustment to the market can also be viewed as a "justified change," but the magnitude of the adjustment may or may not be justified.
The Good Faith Estimate (GFE) disclosure, referred to in the email, will not be around much longer. In November, the Consumer Financial Protection Bureau (CFPB) released the final versions of new disclosure forms that mortgage applicants will receive starting in January 2014.
A new Loan Estimate form, due within three days of submission of a loan application, will replace two existing forms that overlapped in ways confusing to borrowers: the GFE developed and administered by HUD, and the Truth in Lending form (TIL) developed and administered by the Federal Reserve.
The Loan Estimate form is much better than the GFE and TIL. It is shorter, inconsistencies have been removed and the terminology is clearer. In addition, a new Settlement Disclosure form, which must be provided at least three days before closing, will replace the existing HUD1 closing form.
A lot of work went into the development of the forms, which included extensive testing with consumers. CFPB's website provides an enormous amount of information about the rule development process, including the report of the consulting firm that tested different versions of the disclosures. That report alone runs 533 pages! The rule itself runs 1,888 pages.
The disclosures have multiple purposes, one of which -- perhaps the main one -- is to protect borrowers from unjustified changes in the terms of a loan by the lender as the loan process moves toward closing. The GFE and TIL did not do that adequately because consumers receiving revised disclosures were left completely in the dark as to why the revisions were made. I regret to report that the new Loan Estimate that will replace the GFE and TIL does no better.
Indeed, CFPB seems not to have recognized the problem. At the top of page one of the Loan Estimate, it says: "Save this Loan Estimate to compare with your Closing Disclosure," which ignores the possibility that "this Loan Estimate" will be superseded by another one. The Loan Estimate form was extensively tested with consumers, but I could find no indication that changes in the form had been tested at all.
While CFPB seems to have been myopic on this issue, it is also unique among Government regulatory agencies in its apparent openness. Its web site says that: "Someone who thinks there's a way to make disclosures clearer can work with us to start a trial that tests how well their idea works." My colleague Jack Pritchard and I have developed a small addendum to the Loan Estimate where the lender will be obliged to list all items that have been changed from the previous version, and explain the reasons for the change. The addendum has been forwarded to CFPB, keep tuned.
Next week: Will CFPB's New Mortgage Disclosure Forms Help Borrowers Shop For the Best Deal?
Follow Jack M. Guttentag on Twitter: www.twitter.com/JackGuttentag