Loan Disclosure Reform Incomplete without Borrower Education

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Today is the deadline to submit feedback on the Consumer Financial Protection Bureau’s first attempt at combining the Good Faith Estimate and Truth in Lending statement.  If you haven’t shared your thoughts on the matter, I urge you to do so, especially if you’re an industry professional.

HERE is the feedback portal

In the process of developing my own personal perspective on mortgage disclosure reform I took an approach that some folks mind find a bit odd; I sought out a consultant with no direct involvement in the housing industry. In choosing that fresh viewpoint I focused on one factor, this outsider must share a passion for improving financial literacy in America. Why? This is a key step toward preventing another housing crisis. Borrowers must be fully aware of both the benefits and disadvantages they face when deciding whether or not homeownership is right for them.

Sustainable homeownership depends on consumers being able to make well-informed decisions. Combining disclosures into a “simple form” doesn’t mean the borrower actually understands what they’re getting into when they go to closing.  If a consumer isn’t capable of describing the pros and cons of their homeownership decision, how is a “simplified form” going to make the situation any better?

To ensure an in-depth understanding is taken away by the borrower before their loan goes to closing, I would propose a three-step loan application process.

Step 1 — Budget and Borrower Benefit Analysis
This is an
analysis of monthly cash-inflows vs. monthly cash-outflows. Does the consumer know what they can afford (DTI)? If a refinance, what benefit does the transaction offer? On a purchase deal, does the borrower need to come up with more cash,
look for a less expensive home, or continue saving until homeownership makes more sense? Answering these questions seems like common sense, unfortunately all too often the explanation and education that goes along with it is left out.

Step 2: — Financing Options in Multiple Home Price Environments
This is where a borrower’s financing options could be weighed out in varying home price environments. Does one product carry more risk than another if home prices are expected to fall? If home prices are in question, does putting more money down make sense? (For example: FHA vs. Conventional).  In the years ahead, as foreclosure inventory is released into the market, this conversation will remain very relevant.

Step 3 — What to Expect at Closing
This is where the CFPB’s simplified GFE/TIL comes into play, after the borrower fully understands the decision they’re making,  but the new form should include the findings of steps 1 and 2 listed above. In regard to the actual GFE/TIL itself,  I’ve shared a considerable amount of feedback on the CFPB’s first attempt at combining the GFE/TIL. You can read it HERE and share your feedback too.

Simplified home loan disclosures do nothing to promote sustainable homeownership if borrowers don’t understand the information presented in the form. We must do more to protect homeownership in America. Borrower education is key.

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