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Mortgage Loan Disclosures
Fixing The Process
Most bankers agree that mortgage lending is heavily loaded with regulatory burden. The disclosures that the lender must prepare and provide to the borrower during the application, underwriting, and closing process have been identified as particularly burdensome. The problem is how to fix this problem while preserving or improving consumer protections and information.
Mortgage loan disclosures were discussed at the April 17, 1997 Consumer Advisory Council's meeting. Ken Harney, Journalist with the Washington Post Writers Group, quoted from a Mortgage Bankers Association study which found that most consumers (80%) want disclosures as early as possible - even before application. This would help them shop for loan products. Most consumers, he said, would like firm information about all mortgage costs before applying for the loan.
The CAC supported the concepts that mortgage lending disclosure reform should have several goals. First, reform should support providing disclosures as early as possible in the mortgage shopping process.
Second, reform should streamline the duplicative disclosures that presently exist in different regulations.
Third, reform should focus on a set of key disclosures that are most important to the loan-shopping consumer.
Committee members suggested several ideas for disclosure reform including a lump sum quote, making the lender pay all costs, making all costs a finance charge, and combining the HUD-1 and the Truth in Lending disclosure into a single disclosure.
CAC members agreed that Regulation Z disclosures, even the early 3-day disclosures, are provided too late to fully support the Truth in Lending Act's goal of promoting credit shopping. Earlier disclosures, containing several key pieces of information, would be more useful.
Early shopping disclosures could contain information such as the interest rate, index, estimated monthly payment, and information that is on the Good Faith Estimate.
However, early disclosures would create several problems for lenders. First, the disclosures would be provided so early that they would be more generic than customized. This could provide less information for consumers. Second, the burden of compliance would fall most heavily on banks that offer customized loan products - small banks that most need regulatory burden relief.
Terry Jorde, President of Towner County State Bank in Cando, North Dakota, pointed out that a "one size fits all" disclosure would be impossible to prepare. Differences in costs, which may be the result of situation-specific issues such as the need to conduct a full appraisal or update a survey, will affect the finance charge and APR, especially if all costs become included in the finance charge.
Most consumer advocates supported the idea of giving disclosures as early as before the application. They pointed out that such early disclosures would be useful in homeownership and credit counseling.
However, Margo Saunders, Managing Attorney with the National Consumer Law Center, objected to eliminating the final Truth in Lending disclosure on the grounds that the Truth in Lending Act is the statute most used to stop foreclosures. Changes to Truth in Lending could take away this litigation tool.
ACTION STEPS
- Think creatively about how mortgage loan disclosures could be combined and simplified.
- Ask your loan origination staff how customers react to the different disclosures, what customers seem to want to know, and how this differs from the current disclosure scheme.
- Have loan origination staff keep a list of questions customers ask about mortgage loans. After several weeks, review the lists to see if you can identify any good ideas for disclosure reform.
- Write a comment letter to the FRB sharing the information and ideas you have gathered. Remember, there is no right or wrong here - just ideas.
- Take note of the consumerist use of Truth in Lending violations. Use this information in training and communications with lending staff to illustrate the importance of getting it right. Also use it when briefing senior management about the risks of compliance violations.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 7, 6/97
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