The Consumer Financial Protection Bureau (CFPB) is launching a pilot project to determine whether e-closings improve the mortgage process for homebuyers – particularly with regard to disclosures – and also to determine if e-closings present any risks.
The launch of the pilot comes after the CFPB released a report showing that many consumers are frustrated by the short amount of time they have to review the large stack complex documents at a traditional closing.
With the introduction of its new Know Before You Owe disclosures and rules – which lenders must comply with starting in August 2015 – the CFPB is actually increasing the amount of material that consumers need to review at a closing. Basically, these new disclosures (the Loan Estimate and the Closing Disclosure) are designed to make it easier for borrowers to understand the terms of their loan by presenting the information in a clearer, more succinct and more organized format.
One of the common problems with the mortgage closing process is that a borrower can become ‘overwhelmed’ by the sheer number of complex documents that must be read and signed. Very often, borrowers begin to lose focus about halfway through the process and start ‘robo-signing’ documents without even reading them. Or, if they do read them, there is a question as to whether they retain the information.
One of the ways the e-closing helps borrowers better understand the terms of their mortgage is by allowing the disclosures, which are typically multiple pages, to be broken into "bite size" sections which can then be displayed "on screen," making it easier for the borrower to read and understand the documents. At certain key junctures the borrower can be prompted to affirm that they understand what they've read, typically by clicking an "I Agree" button within the e-document. This significantly changes the experience for the borrower.
Through its research, the CFPB determined that consumers often do not have adequate time to review all the documents present at the closing – some of which they have never seen before. In addition, they sometimes feel rushed to get through the process – even when they do not understand the terms of what they are singing.
Exacerbating the problem is the fact that the documents are often filled with jargon and legalese, including terms and acronyms that are unknown to most consumers. Borrowers complain that sometimes the people in the room aren't helpful in explaining what these terms mean. This, in turn, can lead to errors in the closing process.
The CFPB points out that while its new Know Before You Owe mortgage rule addresses some of these challenges – for example, consumers will receive their new Closing Disclosure at least three business days in advance of closing, to provide more time to review the terms of the deal – it does not apply to any of the other paperwork consumers receive at the closing table.
While the CFPB recognizes that e-closings could solve a lot of the problems consumers face, it still has concerns about their feasibility. One concern is that because the e-closing speeds up the process, there is a risk that it could actually reduce borrower comprehension and/or the amount of information retained.
The CFPB's pilot project will evaluate whether e-closings can increase efficiency, consumer understanding and minimize surprises at the closing table.
One of the CFPB's ideas is to get the closing documents into borrowers' hands prior to the closing, so that they have more time to review them. It also plans to explore whether educational materials like document summaries, term definitions or process explanations should be provided to borrowers prior to the closing, so they clearly understand the purpose of each document as well as the key terms and acronyms used.
The CFPB also plans to explore the use of additional software or tools that could be used to detect errors in documents right at the closing table. Such tools could help consumers easily spot discrepancies between their original estimate and their closing disclosures, preventing last minute surprises.
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