New disclosures rules are on their way. Again. Just five years after the rollout of 2010’s Real Estate Settlement Procedures Act (RESPA) disclosure reform, the Consumer Financial Protection Bureau (CFPB) will once again require lenders to overhaul how they disclosure the costs, fees and terms of mortgages.
Aimed to ease borrower frustration, eliminate confusion and accelerate the closing process, the new rules combine the old Good Faith Estimate (GFE) and the Truth in Lending Act (TILA) disclosures into one integrated document, which will be delivered to borrowers within three business days of the initial application or closing.
The “Know Before You Owe” disclosure forms do not go live until August 1, 2015, but how can lenders prepare for the change now? And how can lenders also leverage electronic document innovations to ease the transition to the new forms?
Times They Are A’Changin
The Loan Estimate, which replaces the GFE and the initial TILA, will be sent to borrowers no later than three business days after mortgage application submission. The CFPB tested the new form over the course of the year with consumers and lenders to create a document that is designed to more clearly communicate the financial implications of a mortgage.
The Closing Disclosure, which replaces the final Truth in Lending (TIL) and HUD-1, provides borrowers with a detailed summary of their loan and associated costs. By sending this disclosure three business days before closing, borrowers are able to ask questions and avoid surprises at the closing table. According to a CFPB survey, participants were better able to respond to questions regarding a sample loan while using the new disclosure forms – an improvement of 29 percent – compared to the current forms. By providing financial education and easy-to-read documents, borrowers will be able to easily compare different loans and prepare for estimated costs; improving understanding and offering a better consumer experience.
According to the same CFPB survey, participants cited they did not have as much time as they would like to review the overwhelming stack of paperwork at the closing table. The combined disclosures will usher in a new era of sound and streamlined lender processes, in addition to easing the entire mortgage procedure for borrowers. However, the conventional way of closing a loan is abnormal to how consumers operate and prefer to handle their finances today.
Easing the Transition with Electronic Documents
The ubiquity of online and mobile personal finance management, tax submission and bill pay applications, raises the question as to why the mortgage industry remains behind the times in offering an industry-wide electronic mortgage product for consumers, many of whom are tech-savvy.
The new disclosure forms lend themselves to transitioning to an electronic workflow. Lenders can leverage e-disclosures and e-signing to quickly and inexpensively deliver and receive the documents. The added tracking capabilities of electronic documents helps lenders verify and report to regulators that they are following the required regulations.
Embracing e-disclosures will also pave the way for further adoption of eClosings. The CFPB is adding gasoline to the embers of a full electronic mortgage by soliciting proposals for eClosing pilots. The CFPB’s launch of its eClosing mortgage pilot project aims to explore eClosing opportunities and online educational tools that will benefit consumers during the closing process.
E-Closings are already utilized in the industry, however market penetration and adoption is very low. The simplifying of disclosures opens the proverbial industry-wide eClosing door, however challenges remain. State government laws, integrations, consumer risks and common misconceptions about eClosings hinder the process from taking complete flight. The CFPB’s pilot program will help the industry turn a new page in e-mortgages by exploring and sharing best practices that will ultimately be supported by regulators – and eventually investors.
If lenders are not already updating systems and renegotiating vendor relationships to prepare for August 1, 2015, they are behind, way behind Lenders that align themselves with applications that offer e-capable solutions are better suited to adjust operations for industry-wide eClosings and e-mortgages. Being able to easily send disclosures, generate the documents and close loans electronically will ultimately differentiate business in the eyes of investors and consumers.
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