closing table is the site of considerable pain and confusion for homebuyers, Richard
Cordray, Director of the Consumer Financial Protection Bureau (CTFP) told a
Mortgage Closing Forum on Wednesday.
They find themselves confronted with reams of documents while facing one
of the most important financial commitments of their life. They are frustrated not only by the sheer volume
but by the speed at which they must review those papers and their complexity.
"Mortgage closings are often fraught
with anxiety," the Director said. "We have taken action to address some of the
problems consumers face, but more needs to be done." He announced results of a study done by CFPB
on "closing table pain points" and an eClosing pilot project the Bureau hopes
will provide insight into improving the process.
The report and some guidelines
announced at the forum are the latest components of the CFPB's "Know Before You
Owe" mortgage initiative. In November
2013, the Bureau released two new easier-to-use mortgage disclosure forms, a
Loan Estimate, which provides a summary of the key loan terms and estimated
loan and closing costs and a Closing Disclosure, which offers a detailed
accounting of the transaction. Cordray
said that just this week the new forms won the Center for Plain Language's
Grand ClearMark Award for clear, concise communication, beating out submissions
from private industry, nonprofits, and other government agencies. These forms and the rule governing their use (still
under development) will be implemented in August 2015.
In January CFPB published a Request
for Information asking consumers about the challenges they face when closing on
a home and for feedback from other market participants on ways to encourage the
development of a more streamlined, efficient, and educational closing process. Respondents told the Bureau about three major
pain points for consumers during the closing process:
Not enough time for
review: Many consumers do not even
see the paperwork until they arrive at the closing table. Cordray told the Forum that consumers feel
pressure to rush through the paperwork and sign without understanding the terms
of the deal. "In interviews, we heard that many consumers said they do
not manage to read most of what they are signing. Even those who said
they start off reading the documents confessed that they stop reading by the
end of the stack."
volume of paper: While some of the forms are intended to help consumers better
understand the costs and risks of their mortgages the volume can vary from transaction
to transaction because closing documents and practices are not uniform. Cordray said two people could be closing on
the same type of loan, for the same amount, in the same location, but one may
only have 40 pages of documents while the other has 100 pages or more. Sometimes the only difference is the lender
they use. Some forms are included by
lenders as a result of their legal risk assessments, others may fulfill
federal, state, and local government requirements.
Complexity of documents:Most closing documents are full of
legalese and technical jargon with terms and acronyms unknown to most
consumers. In addition to having little time review and understand the large
volume of paperwork, consumers said others in the room provided little help.
There were often errors in the paperwork which led to delays as closing agents
had to redo the entire closing package.
According to CFPB, the undeniable
result is information overload: "people find that there is just too much
to absorb during the closing process, which may cause them to shut down.
Industry members agreed as well. One settlement agent told us 'there are
far too many redundant papers and it is overwhelming for most borrowers.
There is so much to digest in the stack of paperwork, and so little time to go
through it, that many borrowers do not even bother trying.'"
Cordray said that when the Know
Before You Owe mortgage rule takes effect, it will address some of these
challenges. For example, consumers will receive their new Closing Disclosure at
least three business days in advance of closing. But the Bureau only has jurisdiction over a
few forms in the closing stack and thus no control over how and when the others
are presented to consumers.
CFPB has identified electronic
closings, also known as eClosings, as one solution to address these pain
points. eClosings are already happening in the market today, but few lenders
have adopted them and there is a lot of misinformation about their legality and
feasibility. CFPB announced guidelines at
the Forum for a pilot project later this year to study eClosings.
eClosings can lead to a more
knowledgeable consumer experiencing a better, more efficient process but switching
to an electronic process could also reduce the amount of time consumers spend
reading the closing documents and actively engaging in the process. The pilot project will evaluate whether
electronic closings can increase efficiency, consumer understanding, and
minimize surprises at the closing table. CFPB's guidelines for the pilot provide minimum
functionalities required of potential participants and highlight some advanced
features the CFPB will be looking to test. Participants must submit proposals
as a partnership between a technology vendor providing an eClosing solution and
a lender that has contracted to close loans with that solution.
The CFPB will work with participants
to test many eClosing features, including those that may:
- Enable consumer understanding: The Bureau will test whether educational materials like
document summaries, term definitions, or process explanations available in
advance can improve the process for consumers. The Bureau also plans to
evaluate whether the order of the documents changes the consumer
- Incentivize early document review: The CFPB will look at the various technologies allowing consumers
to see the entire document package ahead of time and evaluate how an early
review may impact the closing process.
- Facilitate error detection: The CFPB wants to test tools that will help both industry
members and consumers spot errors and discrepancies in the closing documents.
Cordray said electronic documents
can make early delivery more convenient and simple and give the consumer time
to review documents, consult with family, professionals, and the lender. They
also offer a way to embed links to educational materials for reference both
before and during the closing. An automated
processes can also make it easier to detect discrepancies potentially
mitigating a big source of consumer frustration.
eClosings also have the potential to
reduce costs. Document delivery costs, the costs of paper and storage
could all be lessened. Cordray said one
leading title company said a typical mortgage closing generates about 6,000
pieces of paper. The company's paper and
storage costs are $20 to 30 million annually - costs that can be significantly
reduced through automated processes. As this company moves into electronic
documentation, those costs are steadily being reduced and some of these savings
can and should be passed along to consumers.
Corday acknowledged that innovation
can create new risks, "So we do not want innovation to come at the expense of
consumers." Any electronic process that
diminishes consumers' ability to act in their own self-interest will raise
serious concerns and merely switching to an electronic process may not necessarily
increase the time consumers spend reading and understanding the documents. "But we aim to incentivize an eClosing
processes that will give consumers the opportunity to review documents in their
home in advance, along with educational materials to promote greater
understanding, while still retaining the option of reading them at the closing
ceremony, where the final and most crucial decisions are ultimately made."
He emphasized that security and
fraud should not be a particular concern as lenders can easily establish a
repository of electronic documents for each closing and the process should not
be designed in ways that deprive consumers of control over decisions that might
have to be made at the last minute at the closing table.
The pilot project, which will take
place over the 15 months before Know Before You Owe goes into effect, will work
with lenders who are already offering eClosing solutions to explore how best to
facilitate and secure the benefits of this approach. Cordray said the pilot is not a rulemaking
process. "Instead it is a potential 'win-win' effort to work with all
stakeholders to ensure that consumers understand the commitment they are making
and experience a more transparent, efficient, and effective process."
Participants in the eClosing pilot
project must already be offering an electronic option to their customers. CFPB will test educational tools and
materials like document summaries, definitions, process explanations, and
checklists that consumers can review before the closing. The Bureau wants to find out what helps
consumers become more informed and to see whether the order of the documents
has an effect on the experience. Ideally
the consumer would receive the entire package of documents at least three days
ahead of the closing. Will the extra
time affect the process? Do consumers
feel less pressure? Are errors less common? Does the process create
more satisfaction for each of the stakeholders?
Cordray said the Bureau plans to identify best practices that they can
share industry wide to benefit consumers.
The complete report on mortgage
closings is available at: http://www.consumerfinance.gov/reports/mortgage-closings-today/