By Jack Guttentag
(MCT)—The Consumer Financial Protection Bureau has developed two new disclosure forms that will replace three forms administered by the Federal Reserve and the Department of Housing and Urban Development. The adoption date was recently extended to August 2015, which hopefully will allow the CFPB to make some needed improvements.
Last week’s column noted that the agency’s new loan estimate disclosure, though a lot better than the disclosures it replaces, will not protect borrowers from unjustified changes in loan terms by the lender as the loan process moves toward closing. Last week, I sent to the CFPB a suggested addendum that would add such protection.
This column asks whether the new disclosure will realize another CFPB objective, which is to help consumers shop among mortgage loan providers for the best deal. In a recent column, I discussed whether borrowers can use the good-faith estimate to shop mortgage prices. (The good-faith estimate is the HUD disclosure that will be replaced by the loan estimate.) The answer is “no,” and the same reasons apply to the new loan estimate disclosure.
This is not a shortcoming of the new disclosure, however, because changing the disclosure rules alone won’t fix the difficulties borrowers face when trying to shop this market. Certain market practices also need to be changed.
The core problem mortgage borrowers face is that it is close to impossible to obtain binding, or “locked,” price quotes from different lenders at the same point in time. The prices quoted by mortgage lenders mean nothing until they are locked. But lenders ordinarily will not lock until the property has been appraised, and each lender orders its own appraisal, which takes time. Meanwhile, mortgage prices are reset every day with changes in the market. Disclosure rules in themselves cannot possibly help borrowers obtain binding price quotes from different lenders at the same time.
The key to a solution is to make appraisals portable, meaning that they could be used with any number of lenders. With a portable appraisal, a mortgage shopper could begin the process by getting an appraisal, then apply to several lenders with the appraisal included with each application. The borrower would invite each lender to make a firm offer at a specified date and time. The offer would specify the interest rate, loan fees and lock fee on the mortgage for which the shopper had applied. The borrower would accept one of the offers that day — offers will lapse at the close of business — and pay the lock fee of the selected lender.
A lock fee will be necessary to discourage shoppers from walking away from deals when interest rates decline, and starting the process again with another group of lenders. But lock fees would be subject to the same competitive pressures as the other components of the mortgage price.
Borrowers could get an appraisal now but could not use it to shop because it would not be acceptable to lenders, who require that it be issued in their name. Making appraisals portable requires that they be issued in the name of the consumer rather than in the name of the lender. Issuing appraisals in the name of a lender effectively makes it the property of that lender. This never made any sense. Since the consumer pays for the appraisal and owns or will own the property to which it applies, the appraisal should belong to the consumer, not to the lender.
The objection to this proposal will be that the integrity of appraisals will be eroded as appraisal management companies compete for consumer clients by inflating values. But lenders will not be obliged to accept appraisals from companies they don’t respect, and in competing for consumer clients, appraisal firms will emphasize the acceptability of their appraisals to lenders.
Indeed, the quality of appraisals probably will rise. Under the existing system, many appraisals come from companies in which the lender ordering the appraisal has a financial interest. That arrangement does not encourage appraisal integrity. If appraisals became the property of borrowers, that system would die out.
This rule change should be accompanied by two new disclosures. One would provide a uniform offer sheet for lenders, making it relatively easy for shoppers to compare the different offers. The second would provide a uniform lock confirmation sent by the lender whose proposal is accepted. This one, however, would be identical to the new loan estimate disclosure, except that it would not be an estimate.
I don’t know whether or not the CFPB could implement this approach under its existing powers. But if it can’t, it should view its responsibilities for protecting consumers broadly enough to include proposing changes in rules that are clearly dysfunctional for consumers.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2013 Jack Guttentag
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