By Christine E. Springer
Today I want to tell you about the new mortgage disclosures that are now required by the Consumer Financial Protection Bureau ("CFPB"). These new forms were finalized last October.
You may remember that before these forms were finalized, lenders were required to give borrowers a Good Faith Estimate within three days of making a loan application, and a Truth In Lending Disclosure form thirty days before the closing of the mortgage.
In many instances, those disclosure requirements weren’t met. I saw the majority of disclosure forms dated for the same day as closing.
While a lot of people made TILA/RESPA arguments in foreclosure defense lawsuits early on, the courts weren’t particularly responsive to TILA/RESPA arguments.
It is too soon to tell how these new disclosure rules will shake out in the case law. We may not find out, either, unless there is another foreclosure crisis. However, the courts have swung more favorably to borrowers on these issues generally, so I'd expect to see them construed more in favor of the borrowers.
Early on in the foreclosure crisis, homeowners were generally considered deadbeats, with the thought being that if you signed on the line, you must have known what you were getting into.
Most of the time, consumers did not read any of the disclosures. This was because the economy was good, many people weren’t expecting anything close to the financial crisis to happen, the banks just kept on lending and people kept on borrowing. The financial crisis was uncharted territory for the United States.
The CFPB was created out of the Dodd-Frank legislation with the idea being that there was no central consumer-oriented agency in the government that oversaw consumer lending. It was very controversial early on, but it was just the beginning of the shifts happening to make things more equitable for borrowers.
The new disclosure forms are just one piece of the changes that the real estate industry and lending industries had to make, and there will no doubt be more changes. The government has taken a tough stance on the consumer lending industry through more regulation and I'll be telling you more about this in future posts.
According to the new rules, disclosures must now be delivered within a certain time period. The new forms are called n Loan Estimate (“LE”) and a Closing Disclosure (“CD”). They are similar to the TILA/RESPA disclosures. I have embedded them into this post, below.
The ILE must be provided to borrowers no later than the third business day after the loan application is made.
The CD explains the final transaction, and it has to be delivered to the borrower(s) at least three days before the closing date.
This is a significant change. In the past, borrowers did not see the closing documents until they were ready to sign.
This caused all sorts of questionable things to happen.
For example, if you were told one thing on the TILA/RESPA disclosure and never received updated disclosures, you might be forced to sign closing documents with less-than-favorable terms, or you wound up with a loan product that was not what you applied for or thought you were applying for.
By the time you got to the closing table, you probably already had your stuff packed up in the moving truck, risked losing your earnest deposit, loan funding and a contractual breach for not going through with the closing on schedule.
A lot of borrowers got stuck signing for different terms than they were initially offered. I saw a lot of initial TILA and GFEs that were completely different than what the borrower initial was told they would be receiving. Sometimes, there was an explanation because things happen during the process of closing on a home, but usually those changes weren't documented through a disclosure form. It was not done that way because it was not required to be done that way.
The CFPB said that this change was intended to give borrowers enough time to compare the LE and CD before the closing of the transaction and to be sure that the terms they applied for were the same. This three day window CANNOT be waived.
This caused a lot of upset in the lending and real estate industries because of delays. It could be frustrating to borrowers too, especially if you just want to get a deal done.
However, I think it is a beneficial change for borrowers – it gives you an opportunity to become familiar with all the documents before you sign them. And, if you see a problem, you have time to sort it out before the closing of the transaction. There won't be any surprises at closing because if there are problems, or you decide on a different type of loan, the closing transaction must be pushed back three days.
It's important as a consumer that you educate yourself ahead of time and take an active role in selecting your loan. In my next post, I will share some ideas about how you can do this.
In the meantime, here is the Loan Estimate document from the CFPB:
And this is the Closing Disclosure:
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