I normally applaud the CFPB for its aggressive regulation and its attempts
to expand its regulatory reach. When the CFPB first started rolling out
proposed mortgage disclosure forms, I was excited. The required disclosures
are one of the most confusing parts of a real estate closing. Most consumers
don't understand how an APR is calculated or why an APR is higher
than the loan's interest rate. However, APR is one of the most important
factors in determining whether a loan is expensive.
new Loan Estimate form (which combines the Truth In Lending and Good Faith Estimate Disclosures),
APR is listed on the last page. The disclosure puts more emphasis on the
"Estimated Cash to Close" figure, which is listed at the bottom
of page one. While this is a nice change for real estate attorneys who
need to give their clients a ballpark estimate on closing costs, it doesn't
do much to emphasize the actual cost of credit.
The actual cost of credit is long-term. How are payments applied? What
is the actual markup due to interest? The cost to close does not disclose
abusive loan terms. It does not disclose loans that are interest-only
for the first five years. It doesn't disclose prepayment penalties.
Quite simply, the cost of credit can vary wildly based on the way the loan
functions over time. A short-term concern like cash to close is not an
indicator of the loan's cost. In many of the closings that I do, lenders
give large credits toward closing costs to help borrowers bring less money
to the closing table. Those types of credits are great for incentivising
borrowing money, but they never indicate the cost of the loan in the long-term.
If the purpose of the new disclosures is to give consumers an informed
choice when purchasing loan products, then the disclosures should put
the most important data up front.
That said, the
new forms do streamline the old forms quite nicely. Less paper is great. The data
is easier to read and absorb when compared to the old forms. While they
are a step forward, we need to ensure that the right information is prioritized
so that the forms function as intended. I largely agree with the
NCLC's analysis as well.