Everyone knows that financing and closing on a home purchase can be complicated. Which is why more than a year ago the Consumer Financial Protection Bureau issued a set of new disclosures and rules designed to bring greater clarity — and certainty — to transactions.
So how’s that going? Maybe not so well from a consumer perspective, if a new survey of 1,000 first-time and repeat purchasers is any guide. Sponsored by ClosingCorp, an industry technology firm, and conducted by Wilson Perkins Allen Opinion Research, the study found that more than 50 percent of buyers were “surprised” by the amounts they were charged at closing, despite the new federal disclosures aimed at eliminating or sharply limiting surprises.
Buyers also told researchers that “52 percent of lenders were ‘off’ on their initial loan estimates” of the fees required to obtain and close on the loan. Fifty-eight percent of buyers said their initial loan estimates had changed or been revised before closing, and 35 percent said their total fees were higher than they had expected. Just 31 percent of buyers reported that there were no shocks or surprises at closing because their lenders’ upfront estimates and the final charges were in sync. A stunning 17 percent of buyers said they were not even aware that closing costs are required when obtaining a home mortgage.
The CFPB’s two new disclosure forms — the Loan Estimate and the Closing Disclosure — replaced the previous Good Faith Estimates, Truth in Lending and HUD-1 settlement statement, which had been in use for many years. The Loan Estimate covers the key information an applicant needs to understand a mortgage quote: principal and interest payments, mortgage insurance premiums, taxes, hazard insurance premiums, closing costs, recordation fees, homeowner association fees and the amount of cash the borrower will need to close. The Loan Estimate must be provided to the buyer within three business days following an application.
The Closing Disclosure itemizes final settlement charges and must be delivered no later than three business days in advance of closing or the date on which the borrower becomes contractually bound to the terms of the deal. The rules governing the disclosures allow for changes by the lender — including increases in charges — under certain limited circumstances, but at the end of the process the itemized charges in the Loan Estimate typically should line up with the final closing costs.
Bob Jennings, CEO of ClosingCorp, told me in an interview that it’s clear that “a sizable portion of the industry still doesn’t have a firm grasp on fees,” and therefore must make updates to disclosures during the process that can be confusing to borrowers. Jennings rejected the idea that because the CFPB’s regulations governing the new disclosures were lengthy and complex, lenders have had trouble getting the numbers right upfront. To the contrary, he said, the disclosures are expressly designed to put strict “accountability on lenders” for their estimates — a major problem under the old disclosures when borrowers sometimes wouldn’t learn about increases in expenses until the day of the scheduled closing.
Pete Mills, a senior vice president at the Mortgage Bankers Association, told me that although there was an initial learning curve for lenders in gearing up for the new rules, “our sense is that things have gotten better.” He cited an industry audit by Aces Risk Management that found that by mid-year 2016, just 1.63 percent of loan files contained “critical defects” — errors in the documents or the procedures followed by lenders that violated CFPB’s rules.
Mills said the fact that 58 percent of buyers in the ClosingCorp survey reported their initial loan cost estimates had changed “is evidence that the rule is working as written.” When there are changed circumstances affecting the application, the lender is supposed to reflect that in the disclosures.
Asked for comment on the ClosingCorp findings, Sam Gilford, a spokesman for the CFPB, said the “survey results show that lenders and closing agents can do more to educate borrowers about the purchase process and associated fees, and for lenders to improve the initial accuracy of their loan estimates.”
What does this all mean for you if you’re planning to buy a house or get a mortgage? Most important: Be aware that even if there is a change or two to estimates along the way, ask your lender for explanations immediately, and make sure you receive and review your final closing charges well in advance of the settlement. You should never end up surprised.