Our readers should be aware that the financial crisis has spawned at least one new government agency. In this post, we address the Consumer Financial Protection Bureau (“CFPB”), whose central mission is “to make markets for consumer financial products and services work for Americans— whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” With respect to mortgages, the CFPB has recently promulgated proposed regulations pertaining to mortgage disclosure.
Many people believe that the financial crisis and resulting recession were caused by borrowers entering mortgages that they did not understand and becoming financially overwhelmed as a result. The CFPB has recently proposed regulations intended to prevent this problem in the future. Revisions to the Good Faith Estimate document and the preliminary Truth-in-Lending Disclosure form figure prominently in the new regulations, so that borrowers understand the loan terms and the actual cost. For instance, the new document that combines the purposes served by the Good Faith Estimate and the preliminary Truth-in-Lending Disclosure form, now entitled the Loan Estimate, is to be presented within three business days of the mortgage application and purports to be easier to understand than similar documents presented in the past.
Further, another document, entitled the Closing Disclosure, to be presented to the borrower three business days before closing, is intended to replace the form known as the HUD-1 and the revised Truth-in-Lending Disclosure form. The Closing Disclosure is meant to prevent a borrower from being surprised by unexpected closing costs and the amount of cash needed to close. While most consumer mortgages are covered by the regulations proposed by the CFPB, common mortgage transactions such as home-equity lines of credit and reverse mortgages are excluded.
While the disclosure rules promulgated by the CFPB are well-intentioned, they may have a chilling effect on loan activity. The intense scrutiny and regulation of lenders may discourage some mortgage companies from making loans to certain categories of customers and from offering particular loan products. Lenders, mortgage brokers and settlement agents are required to follow a complicated set of rules at every step of the transaction. The mortgage industry has already adapted to regulations enacted after the financial crisis and may now be in a position to adapt to even more revisions, requiring additional understanding of the forms and regulations and training of those who need to use the documents. Further, while the CFPB has prohibited loan modification fees, payoff statement fees and excessive late payment fees, lenders will find what may be more onerous ways to make money or they may exit the loan business entirely. Certainly, making it more difficult for lenders to close loans is no way to propel our economy to recovery.
The new disclosure forms do not substitute for clients having a relationship with a trustworthy attorney who explains the terms of the proposed transaction in a means suitable to the particular person, based upon the sophistication of his or her understanding. The lender is disclosing the information required by the government on these disclosure forms. Borrowers should not be misled into thinking that the lenders are taking the next step in advocating for them when receiving these disclosure forms. Further, the disclosure forms will only contain the provisions required by the government, which may not include all financial details of the transaction. Our firm prides itself on personal service and detailed attention to our clients’ requirements. We are pleased to accompany our clients from the offer stage of a transaction through the closing, leaving our clients with a thorough understanding of the documents signed and their implications to their financial future.
The CFPB is offering a period for comments, which may allow for the revision of these disclosures, prior to their effective date. Our firm will continue to keep abreast of developments in this area, so that it can provide timely advice to our clients.