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CFPB Pilot Program Seeks to Lessen Closing Table Pain
The mortgagernclosing table is the site of considerable pain and confusion for homebuyers, RichardrnCordray, Director of the Consumer Financial Protection Bureau (CTFP) told arnMortgage Closing Forum on Wednesday. rnThey find themselves confronted with reams of documents while facing onernof the most important financial commitments of their life. They are frustrated not only by the sheer volumernbut by the speed at which they must review those papers and their complexity. </p
“Mortgage closings are often fraughtrnwith anxiety,” the Director said. “We have taken action to address some of thernproblems consumers face, but more needs to be done.” He announced results of a study done by CFPBrnon “closing table pain points” and an eClosing pilot project the Bureau hopesrnwill provide insight into improving the process.</p
The report and some guidelinesrnannounced at the forum are the latest components of the CFPB’s “Know Before YournOwe” mortgage initiative. In Novemberrn2013, the Bureau released two new easier-to-use mortgage disclosure forms, arnLoan Estimate, which provides a summary of the key loan terms and estimatedrnloan and closing costs and a Closing Disclosure, which offers a detailedrnaccounting of the transaction. Cordrayrnsaid that just this week the new forms won the Center for Plain Language’srnGrand ClearMark Award for clear, concise communication, beating out submissionsrnfrom private industry, nonprofits, and other government agencies. These forms and the rule governing their use (stillrnunder development) will be implemented in August 2015. </p
In January CFPB published a Requestrnfor Information asking consumers about the challenges they face when closing onrna home and for feedback from other market participants on ways to encourage therndevelopment of a more streamlined, efficient, and educational closing process. Respondents told the Bureau about three majorrnpain points for consumers during the closing process:</p<ul class="unIndentedList"<liNot enough time forrnreview: Many consumers do not evenrnsee the paperwork until they arrive at the closing table. Cordray told the Forum that consumers feelrnpressure to rush through the paperwork and sign without understanding the termsrnof the deal. “In interviews, we heard that many consumers said they dornnot manage to read most of what they are signing. Even those who saidrnthey start off reading the documents confessed that they stop reading by thernend of the stack.”</li</ul<ul class="unIndentedList"<liOverwhelmingrnvolume of paper: While some of the forms are intended to help consumers betterrnunderstand the costs and risks of their mortgages the volume can vary from transactionrnto transaction because closing documents and practices are not uniform. Cordray said two people could be closing onrnthe same type of loan, for the same amount, in the same location, but one mayrnonly have 40 pages of documents while the other has 100 pages or more. Sometimes the only difference is the lenderrnthey use. Some forms are included byrnlenders as a result of their legal risk assessments, others may fulfillrnfederal, state, and local government requirements.</li</ul<ul class="unIndentedList"<liErrors and</bComplexity of documents:Most closing documents are full ofrnlegalese and technical jargon with terms and acronyms unknown to mostrnconsumers. In addition to having little time review and understand the largernvolume of paperwork, consumers said others in the room provided little help.rnThere were often errors in the paperwork which led to delays as closing agentsrnhad to redo the entire closing package. </li</ul
According to CFPB, the undeniablernresult is information overload: “people find that there is just too muchrnto absorb during the closing process, which may cause them to shut down. rnIndustry members agreed as well. One settlement agent told us ‘there arernfar too many redundant papers and it is overwhelming for most borrowers. rnThere is so much to digest in the stack of paperwork, and so little time to gornthrough it, that many borrowers do not even bother trying.'”</p
Cordray said that when the KnowrnBefore You Owe mortgage rule takes effect, it will address some of thesernchallenges. For example, consumers will receive their new Closing Disclosure atrnleast three business days in advance of closing. But the Bureau only has jurisdiction over arnfew forms in the closing stack and thus no control over how and when the othersrnare presented to consumers.</p
CFPB has identified electronicrnclosings, also known as eClosings, as one solution to address these painrnpoints. eClosings are already happening in the market today, but few lendersrnhave adopted them and there is a lot of misinformation about their legality andrnfeasibility. CFPB announced guidelines atrnthe Forum for a pilot project later this year to study eClosings. </p
eClosings can lead to a morernknowledgeable consumer experiencing a better, more efficient process but switchingrnto an electronic process could also reduce the amount of time consumers spendrnreading the closing documents and actively engaging in the process. The pilot project will evaluate whetherrnelectronic closings can increase efficiency, consumer understanding, andrnminimize surprises at the closing table. CFPB’s guidelines for the pilot provide minimumrnfunctionalities required of potential participants and highlight some advancedrnfeatures the CFPB will be looking to test. Participants must submit proposalsrnas a partnership between a technology vendor providing an eClosing solution andrna lender that has contracted to close loans with that solution. </p
The CFPB will work with participantsrnto test many eClosing features, including those that may: </p<ul class="unIndentedList"
Cordray said electronic documentsrncan make early delivery more convenient and simple and give the consumer timernto review documents, consult with family, professionals, and the lender. Theyrnalso offer a way to embed links to educational materials for reference bothrnbefore and during the closing. An automatedrnprocesses can also make it easier to detect discrepancies potentiallyrnmitigating a big source of consumer frustration.</p
eClosings also have the potential tornreduce costs. Document delivery costs, the costs of paper and storagerncould all be lessened. Cordray said onernleading title company said a typical mortgage closing generates about 6,000rnpieces of paper. The company’s paper andrnstorage costs are $20 to 30 million annually – costs that can be significantlyrnreduced through automated processes. As this company moves into electronicrndocumentation, those costs are steadily being reduced and some of these savingsrncan and should be passed along to consumers.</p
Corday acknowledged that innovationrncan create new risks, “So we do not want innovation to come at the expense ofrnconsumers.” Any electronic process thatrndiminishes consumers’ ability to act in their own self-interest will raisernserious concerns and merely switching to an electronic process may not necessarilyrnincrease the time consumers spend reading and understanding the documents. “But we aim to incentivize an eClosingrnprocesses that will give consumers the opportunity to review documents in theirrnhome in advance, along with educational materials to promote greaterrnunderstanding, while still retaining the option of reading them at the closingrnceremony, where the final and most crucial decisions are ultimately made.”</p
He emphasized that security andrnfraud should not be a particular concern as lenders can easily establish arnrepository of electronic documents for each closing and the process should notrnbe designed in ways that deprive consumers of control over decisions that mightrnhave to be made at the last minute at the closing table. </p
The pilot project, which will takernplace over the 15 months before Know Before You Owe goes into effect, will workrnwith lenders who are already offering eClosing solutions to explore how best tornfacilitate and secure the benefits of this approach. Cordray said the pilot is not a rulemakingrnprocess. “Instead it is a potential ‘win-win’ effort to work with allrnstakeholders to ensure that consumers understand the commitment they are makingrnand experience a more transparent, efficient, and effective process.”</p
Participants in the eClosing pilotrnproject must already be offering an electronic option to their customers. CFPB will test educational tools andrnmaterials like document summaries, definitions, process explanations, andrnchecklists that consumers can review before the closing. The Bureau wants to find out what helpsrnconsumers become more informed and to see whether the order of the documentsrnhas an effect on the experience. Ideallyrnthe consumer would receive the entire package of documents at least three daysrnahead of the closing. Will the extrarntime affect the process? Do consumersrnfeel less pressure? Are errors less common? Does the process creaternmore satisfaction for each of the stakeholders? rnCordray said the Bureau plans to identify best practices that they canrnshare industry wide to benefit consumers.</p
The complete report on mortgagernclosings is available at: http://www.consumerfinance.gov/reports/mortgage-closings-today/
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About the Author
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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