Wednesday, August 4, 2010

Disclose, Disclose, Disclose

Yesterday we talked about Tim Geithner's good will tour which began over the weekend and is continuing as Geithner speaks to Wall Street, writes articles and appears on numerous television programs touting the passage of the Dodd Frank bill. In fact, according to an AP article by Emily Fredrix and Martin Crutsinger, Geithner's speech at NYU on Monday was "the opening salvo in what the administration says will be an extensive outreach effort to educate the public about the new law." Of course, Geithner is also setting the stage for the Treasury Department's summit taking place on August 17, where industry insiders and consumer advocacy groups will be brainstorming to find solutions to the problems in the mortgage industry. And one of the top priorities of the summit is apparently a new mortgage disclosure! Geithner is quoted in the AP article saying, "We want to move quickly to give consumers simpler disclosures for credit cards, auto loans, and mortgages so that they can make better choices, borrow more responsibly, and compare costs and services."

Specifically, on the mortgage side, Geithner appears to be referring to a new form to take the place of both the good faith estimate and the truth in lending form. The Dodd Frank bill calls for the creation of a new combined disclosure which will pull aspects of both disclosures into one mighty form which will tell consumers everything they need to know about buying a home but were afraid to ask.

The amazing irony here is that all of us who have been working in the industry over the last two years know that HUD just completed its revision of the good faith estimate and began requiring that the industry use the new form January 1, 2010. Even though many industry participants begged for more time and asked for an extension, HUD denied those requests and required that all of us begin using the 2010 GFE because it would supposedly provide better disclosure to consumers and prevent them from getting loans they did not understand.

The 2010 GFE was actually the result of six years of work by HUD. I remember clearly when RESPA reform was first proposed in July of 2002. I was almost finished with my year of being president of the El Paso Association of Mortgage Brokers, and I was actually in Austin for what would have been my final state board meeting, when we got the news that HUD had rolled out RESPA reform. The industry spent the next eighteen months writing letters and working to derail RESPA reform, and in the spring of 2004, just about 90 days from implementation of the final rule, RESPA reform was stopped. Over the next four years, HUD held round table discussions and did consumer studies to revise the GFE. When they finalized RESPA reform in 2008, it looked to me very much as it had in 2002--there were no meaningful changes that I am aware of between the initial proposed GFE revisions in 2002 and what actually became law in 2008. (If anyone out there knows anything different I would welcome the comments.)

When the rule was finally implemented in 2010, the cost to the industry in training, revising systems and generally changing the way we do business was huge. I heard estimates that as many as 25% of residential mortgage loans fell through when the new GFE was implemented because the loan officers did not have the GFE filled out properly. Loan officers reportedly cancelled transactions rather than pay the difference on misquoted GFEs. The change was very expensive--for the loan officers, the title companies and the borrowers who had their transactions cancelled and had to go find new financing to purchase or refinance their house.

Now, 8 months into the implementation of the GFE, we have learned how to fill out the forms. We know that the owner's title policy goes on the Good Faith Estimate even though the borrower does not pay for it and will call us and ask us what it is. In states with transfer taxes (which Texas, fortunately does not have) loan officers know to put those on the Good Faith Estimates as well. We have our service provider lists and our quotes for pest inspections and home inspections. We all know what an "important date" is, and we have our forms to redisclose to the borrower if anything changes. Life is pretty much back to normal.

Certainly, it takes longer to prepare a good faith estimate than it used to. I used to prepare them while my borrowers waited at the time of initial application--now I get an email address and email it to them within 24 hours with a note to call me with any questions. And the new three page form does not tell the borrower what their payment will be with taxes and insurance, so I have to take special care to make sure that I disclose that in the body of my email or they tend to think that the principal and interest payment which is reflected on the good faith estimate is all they have to pay. And the new estimate does not tell them how much money they need for closing, so I do my best to estimate that accurately, although the new form contains so many charges that they do not have to pay that it is very hard to be really accurate. But the final number usually comes in quite a bit less than my best estimate, so they feel happy when they do close.

I read a blog that commented that the new GFE gets rid of junk fees. That's just not true--it just lumps all of the fees into one origination fee. A borrower cannot tell you any longer that they don't want to pay an origination fee because all of the lender's fees and my fees and the attorney fees (in Texas real estate documents must be prepared by an attorney) are lumped into the origination fee. If anything, I believe that it has made loans more expensive rather than cheaper, because borrowers cannot break down what comprises the lump sum fees that they see, and therefore they cannot challenge them. But this form is the result of 6 years of research by the Office of Housing and Urban Development, so if they say it is better, I am sure it is.

Of course, the Truth in Lending form was just revised last year as well. The new Truth in Lending contains basically the same information as the old Truth in Lending form, but the Federal Reserve did add a notice to the form which notifies the borrower, "You are not required to complete a loan application just because you have received this disclosure." The revisions to Truth in Lending implemented last year also required that if the APR increases more than 1/8 of 1% before closing, the borrower must be given a new Truth in Lending with the correct APR three business days prior to closing. Most borrowers do not really understand what the APR is or how it is calculated, but at least they are informed if and when it increases.

Now the government wants to do a new form which will combine these two forms into as the AP story says, "one, new easy-to-understand federal disclosure form." But that was the intent of the original good faith estimate and the revised good faith estimate. It was the intent of the truth in lending form when that form was introduced--if borrowers could see their interest and fees as a percentage they would better understand the cost of credit. Apparently, from the foreclosure mess we are experiencing, none of these forms is adequate to explain the mortgage process sufficiently to stop people from attempting to buy homes.

And that really is part of the problem here. Disclosure is important, but overdisclosure tends to become like any other type of sensory overload we experience in life--after a while we stop paying attention and start tuning it out. And when disclosure does not change behavior--as in the case of borrowers who insist that they want a mortgage loan in spite of all of the warnings--then the disclosures must be changed.

In tomorrow's post we will look at what we may expect from the new disclosures, based on the published writings of one of those individuals who will be involved in the disclosure drafting process.

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