If you’re planning to buy a home with a mortgage in 2016, you’re virtually certain to encounter a new consumer-friendly federal disclosure — the Loan Estimate.
But the question is: Will you use it as a shopping tool, comparing competing lenders’ offers in detail, as the Loan Estimate’s designers hoped you would?
Based on interviews with a group of large and small lenders plus real estate brokers, the answer may well be: Probably not. But shouldn’t smart buyers be making the most of what it offers?
First some background. Last October, the Consumer Financial Protection Bureau launched its ambitious package of new disclosures and rules governing home mortgage transactions as part of its “Know Before You Owe” campaign. The Loan Estimate is the upfront piece — lenders must provide it three business days after you apply — and it replaces the traditional “Good Faith Estimate” and “Truth in Lending” disclosures.
In three pages, it provides you an in-depth scan of the mortgage you’re considering: It details not only the mechanics of the loan — interest rate, annual percentage rate, monthly principal and interest payments, property taxes, insurance and other escrow items — but also the itemized charges you’ll be hit with and the amount of cash you’ll need to close the transaction. Better yet, you can pretty much depend on the cost disclosures as the final ones you’ll pay because lenders face massive financial penalties if they play games and charge you more at closing.
Under the CFPB’s rules, after you receive your Loan Estimate you have 10 days for shopping the competition before finally agreeing to the deal or ditching it. The CFPB recommends borrowers obtain Loan Estimates “from three or more lenders” before making a final choice. Sounds sensible, but are buyers actually doing that?
Apparently not so much. Bill Emerson, chief executive of Quicken Loans, the country’s second highest volume mortgage lender, says his firm is seeing no surge in shopping by applicants using the Loan Estimate. “I don’t think consumers are changing the way they shop simply because” they have a new tool to do so, Emerson said in an interview. The process of buying and financing a home is so complicated and emotional that many people find it easier to simply locate a reputable lender quoting a good interest rate, he said, and go with that lender rather than making multiple applications and comparing Loan Estimates.
For its part, the CFPB is taking the long view and recognizes that changing consumer behavior takes time. It cites a study that found that in 2013, 77 percent of all borrowers applied to only one lender or mortgage broker. “As the marketplace adapts to the new rule,” said spokesman Sam Gilford, “we hope to see more consumers shopping around for loans, just like they shop for houses.”
Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.