NEW YORK (BankingMyWay) -- If the financial crisis had a silver lining, maybe it was that most of the complex, confusing and toxic mortgage products that contributed to the mess were pulled from the market. It turned out many were as hazardous to the lenders and mortgage investors as they were to homeowners.
Unscrupulous lenders and brokers are always waiting in the wings, though, looking for the next chance to prey on the unwary. To reduce that risk, the Consumer Financial Protection Bureau has proposed new rules to make the mortgage process transparent, so borrowers know what they are getting, what loans will cost at the start and in the future, and finally, so borrowers know when to not sign on the dotted line because a change in terms merits a raised eyebrow.
The CFPB proposals -- now subject to a six month public review period -- are a good guide to what borrowers have a right to expect from fair-minded lenders. Basically, all loan terms should be clear to ordinary borrowers, and there should be no last-minute surprises.
The proposals from the CFPB don’t say it directly, but the underlying message is that a borrower should stop the process and refuse to sign if anything seems confusing or different from what he or she had been led to expect.
That’s easily said but difficult for many borrowers to do in practice.
“When a consumer goes to sign the final paperwork on a mortgage, it is a stressful experience,” said director of the one-year old CFPB, Richard Cordray, introducing the proposals July 9. “There are stacks of paper to read right there on the spot, often with the real estate agent and settlement agent hovering over them. The consumer often is seeing much of this paperwork for the first time. Numerous signatures are required. Words swirl. It is a daunting experience."
“At this point, it is not easy to object, to ask questions, or to walk away from the deal. The unspoken understanding is that by now, everything is set in stone – except that typically the consumer had little to do with the masonry, and this is the biggest financial decision of her life.”
To help borrowers avoid this, the CFPB proposes requiring that all the data in closing documents be provided to the borrower no less than three days before closing. Also, closing documents would be designed to match the loan-estimate document provided when the borrower applied for the loan, making apples-to-apples comparisons easier. That “good faith estimate” form will be revised to make loan terms clearer.
“Interest rate, monthly payments, and closing costs will be clearly presented on the first page, along with information about whether and how these terms can change during the life of the loan,” Cordray said.
That last element – changes over time – reflects concerns about adjustable-rate mortgages that typically change rates every 12 months once an initial period has expired. Big jumps in ARM rates can cause monthly payments to soar, a key problem in the financial crisis.
Other rules will simplify the terminology for “points” and other fees, to make it clear that “discount points” paid up front have the expected effect of reducing the loan rate and producing real savings for the borrower who keeps the loan long enough. Often, lenders use the term "points" with other types of fees that do not reduce the loan rate.
The CFPB says it also will push loan servicing companies to improve their service, so that borrowers with questions or problems will get quick and accurate responses.
To some, this may all look like closing the barn door after the horse has escaped, as the most toxic types of loans no longer exist and today’s lenders are, if anything, too conservative in approving loans. But many consumers continue to struggle to understand how mortgages work, and they can easily be hoodwinked by pros who deal with mortgages every day.
A borrower unfamiliar with mortgages should take it slow, and perhaps pay a few hundred dollars extra to have a real estate lawyer check over the documents, even the CFPB-proposed new-and-improved ones.
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