Two new mortgage documents are coming on August 1, 2015. The Loan Estimate form and the Closing Disclosure forms are designed to give consumers a clearer picture of their borrowing costs.
Mortgage shoppers should see the full cost of a loan at the time they apply, and have a more detailed breakdown a few days before closing. These have long been the marching orders given by federal financial regulators. And for the most part, they’re followed. Lenders typically provide a Good Faith Estimate (GFE) form when a person first applies for a home loan, followed by a “HUD-1” Settlement Statement shortly before closing day.
But starting in August 2015, these all-important mortgage documents are being replaced. The Consumer Financial Protection Bureau (CFPB), one of several government agencies that regulate the mortgage lending industry, has set a date for the implementation of two new mortgage documents. These forms are very important to borrowers, and for two different reasons:
- The new Loan Estimate form helps borrowers understand the full cost of the mortgage, including fees and interest. It can be used during the shopping process to compare “apples to apples.”
- The new Closing Disclosure form helps borrowers know what to expect on closing day, and how much cash they’ll have to bring to the table.
The ‘Loan Estimate’ Form Helps You Comparison Shop
As its name implies, the new Loan Estimate form is designed to give borrowers an approximated view of the full cost of the mortgage loan.
In this context, “full cost” means that the form shows the various fees and charges that can inflate the amount of money due at closing.
Many home buyers are surprised by the different lending fees that can pile up along the way. There’s a fee for everything, from the initial application to the final document preparation. The Loan Estimate form offers an estimated breakdown of these various charges that will be due at closing.
More importantly, it shows the amount being borrowed, the interest rate being assigned to the loan, and whether or not there are prepayment penalties.
This form standardizes the loan estimating process, which makes it easier for consumers to comparison shop when getting quotes from different lenders. Lenders must provide this document within three days of the application.
The new Loan Estimate form replaces the early Truth in Lending Statement and the Good Faith Estimate, two documents that often contained duplicate information. By rolling two documents into one, and by presenting the information in a more consumer-friendly manner, CFPB hopes to reduce confusion and better prepare borrowers for the closing process.
The ‘Closing Disclosure’ Form Prepares You for Closing
The new Closing Disclosure form helps borrowers prepare for the actual costs that will be due at closing. Think of it as a finalized, and therefore more accurate, version of the Loan Estimate.
Borrowers must receive the Closing Disclosure at least three business days before the scheduled closing date. This gives them time to review the document and prepare a check for the total amount needed to close the loan.
Here again there are two documents being replaced by one, in an attempt to simplify and streamline the communication process. The new Closing Disclosure coming in summer 2015 will replace both the final Truth in Lending statement and the HUD-1 settlement statement.
As with the previous document, the goal here is to reduce confusion and provide clearer information to consumers. The revised 5-page form provides a detailed breakdown of the money due at closing, and it shows where that money is going.
Educating Consumers and Avoiding Surprises
The creation of these new mortgage documents was driven by three overriding goals. The CFPB wanted to (1) improve consumer understanding of the mortgage process, (2) simply comparison shopping, and (3) help people avoid “costly surprises at the closing table.”
I have carefully reviewed these documents, and they do seem like they will help in these three areas. If borrowers read these forms carefully (and ask questions when needed), they will have a much better understanding of their closing costs and overall loan structure.
The Product of Much Research and Planning
These new mortgage documents were not designed on a whim. They are the result of extensive planning and research. The CFPB actually conducted what amounts to usability testing, to see how consumers would react to the revised forms. Their research showed that consumers understood the new Loan Estimate and Closing Disclosure forms better than their predecessors. This was true even for people who had never been through the mortgage process before.
During the overhaul process, CFPB solicited feedback from mortgage professionals and the general public. They also held review and discussion panels to gather additional feedback. It seems their efforts have paid off. According to their research, “participants who used the CFPB’s new forms were better able to answer questions about a sample loan – a statistically significant improvement of 29 percent.”
While some in the mortgage industry malign the new documents as overzealous bureaucracy and micromanagement, the Home Buying Institute applauds CFPB’s efforts to simplify the mortgage disclosure process for consumers. It’s a step in the right direction.