August 22, 2011, Revised September 24, 2011, May 17, 2014

“I recently read that the Consumer Financial Protection Bureau is going to make the mortgage loan closing process more consumer friendly.  Do you think it can?” 

I read the statement by the CFPB director, who correctly identified the closing problem: too many documents many of which are badly-designed, insufficient time for borrowers to read them, and insufficient help in understanding them. But I wouldn’t delay purchasing a home until CFPB makes the closing process  consumer-friendly, because that isn‘t going to happen anytime soon -- if ever. 

CFPB controls only a few of the documents in the closing package, the most important of which is its new Loan Estimate form which becomes effective in August 2015. In some earlier articles, I described the forthcoming Loan Estimate as a major disappointment. It will be an improvement over the Good Faith Estimate and Truth in Lending forms that it replaces only in collapsing two poor disclosure documents into one poor disclosure document.  

The remaining documents in closing packages are required by other Federal agencies, states, and the individual lender dealing with the borrower. Each entity is focused on its own disclosure, and how it fits into the total package is ignored. Whether CFPB can do anything about that is doubtful. 

CFPB can require that the borrower have more time to read documents before closing, and the director indicates an intention to extend the borrower’s right to receive the closing package from 1 day before closing, which is the rule now, to 3 days. However, extending the period without making the document package more manageable won’t help many consumers. Few of them now take advantage of the one-day period.  

Classifying Documents 

In this article, I take a different approach to making the closing package more manageable to borrowers. This approach divides the document package the borrower receives into 4 groups that call for different treatment. Only one of them requires the borrower’s careful scrutiny immediately before or at the closing. The categories are as follows:  

Junk documents are of no value to the borrower, so the objective should be to identify and sign them as quickly as possible.

Educational documents contain information the borrower should know, and should be read and digested any time before the closing.

Future Use documents may become relevant in the future and should be accessible, but no time need be expended on them at or before closing.

Transactional documents contain the details of the mortgage loan, which probably changed during the loan processing period, requiring the borrower’s full attention subject to the greatest time pressure. 

About half of the documents borrowers receive can be signed quickly and pushed aside because they do not require the borrower’s attention. Most are merely acknowledgements that a disclosure that the law requires lenders to provide has in fact been provided.  Here is my current junk list:

Servicing Disclosure: You acknowledge being told that the lender who made your loan may not service it.

Name Affidavit: You acknowledge that you are who you say you are.

Mortgage/Deed of Trust: This is a long document that details the terms of the lien that the lender has on your property, and your obligations in connection with the lien, such as maintaining your homeowners insurance and paying the property taxes.

ARM Rider: Repeats information in the note.

Appraisal Report Disclosure: This document acknowledges receipt of the appraisal report.

Attorney Selection Notice: This document acknowledges that you have been advised of your right to have an attorney at the closing.

Authorization to Release Information: This document authorizes the lender to obtain information from third parties, such as banks and employers, for the purpose of verifying the information you have provided.

Consumer Privacy Policy Notice: This document performs much the same function, indicating the types of information about you the lender can disclose, and to whom it may be disclosed. 

Itemization of the Amount Financed: This document provides a breakdown of a useless number on the Truth in Lending form, which you can safely ignore. This and the item that follows will not appear in the package after August 2015.

Affidavit Regarding Good Faith Estimate (GFE): This document requires you to acknowledge that the lender provided you with the GFE within the time period, and under the circumstances stipulated by the law.

Fair Credit Reporting Act Notice: This document acknowledges that if you are delinquent or default on your payment, the lender will report it to a credit bureau.

Equal Credit Opportunity Act Notice: This document requires you to acknowledge that you have been informed a) that the lender cannot discriminate against you on the basis of race, color, religion, and so on, and b) where to go to report violations.

Tangible Net Benefit Worksheet: On a refinance where the lender is required by state law to assure that the borrower receives a net tangible benefit from the transaction, or elects to provide such assurance even if not required, the borrower must acknowledge receipt of the document attesting to the benefit.

IRS Forms W-9 and 4506-T: These documents certify that you are a taxpayer, and authorize the lender to look at your tax returns.

Escrow Account Waiver: In this document, borrowers who have paid lenders to waive the escrow requirement, acknowledge responsibility for making the payments themselves, and the consequences if they don’t.

While no two document packages are exactly alike, you should have no trouble identifying junk documents in your package that are not in mine. This will cut your document pile roughly in half.

Educational Documents

Educational documents can be read at any time before closing, the earlier the better.

Borrower’s Closing Affidavit: This document requires the borrower to acknowledge in writing some critical pieces of information upon which the lender depended in approving and pricing the loan. This includes the borrower’s intentions regarding occupancy of the property, the financial and employment information included in the application, and the condition of the property. (In some document packages, the borrower’s commitment regarding occupancy is broken out into a separate Occupancy Affidavit.) On a purchase transaction, the borrower must assume full responsibility for any contractual loose ends involving the seller. Borrowers are also required to declare that they have not taken on any new debt since they applied, and their employment status has not changed.

If the borrower has been 100% forthright in providing information on the application and other documents submitted to the lender, if the borrower’s financial status has not changed, and if all issues connected to the sale transaction have been resolved, the borrower can sign this document without hesitation.

Notice of No Oral Agreements: This document requires the borrower to acknowledge that the deal with the lender is wholly governed by the written agreements. You cannot come back later and claim that “The loan officer told me…” If what the loan officer said is not in the documents, it has no force.

Borrowers sometimes write me after closing (sometimes years after closing) to complain that the loan they had was not the one their loan officer had told them they had. They had signed the notice at closing but had not absorbed the content, probably because it was one of 30 or more documents they had to sign that day. This particular educational document should be digested before dealing with a loan officer. 

Notice of Right to Cancel: If you are refinancing, you have three business days from closing to cancel the deal and get all your monies back. This is a very important right that protects you against any skullduggery by the lender, but only if you are aware of it beforehand and are prepared to use it if necessary. Borrowers who do not become aware of this right until the closing rarely exercise it or use it to their advantage.

ARM Program Disclosure: This document has important information about the adjustable rate mortgage (ARM) that is not in the note or the ARM rider to the note. This includes the recent value of the ARM index, the maximum payment over the life of the loan, and the month in which the maximum payment is reached. It is only relevant, of course, if you have selected an ARM.

Amortization Schedule: Some document packages include a schedule showing the payment and loan balance every month over the life of your loan. It is based on the assumption that the borrower never makes an extra payment or fails to make the scheduled payment. On-line calculators including mine allow you to update this schedule as needed. 

  Future Use Documents

Some documents instruct on borrower responsibilities after closing, and on what is expected to happen during the first year. You should keep them in a separate file folder for easy retrieval.

First Payment Letter: This document sets out the amount and composition of the initial monthly payment, where and how to send it, when it must be received, and so on. But be aware that before the first payment is due, you may receive another instruction that replaces the one you received at closing. This will happen if your loan is sold before the first payment is due, which often happens.

Escrow Account Statement: This document describes the responsibilities of the borrower in connection with the escrow account established for the payment of taxes and insurance.

Initial Escrow Account Disclosure Statement: This document shows expected inflows to and outflows from the escrow account during the first year of the loan.

Tax and Hazard Insurance Record: This document provides information on your property taxes and homeowners insurance. It is filled out by the settlement agent, not you, but you should retain it in your loan folder.

Correction Agreement: This document obliges you to assist the lender in recovering any lost documents, pay any fees that the lender failed to collect at closing, and be available for a quality control audit after closing. For good reason, these provisions stick in the craw of many borrowers, but bite your lip and sign it.

Binding Arbitration Agreement: This document obliges you to accept binding arbitration to settle any future disputes between you and the lender, and between you and any third parties involved in the loan process. This agreement remains in force even after the loan is paid off.

Future Flood Insurance Authorization: This document obliges you to purchase flood insurance if Government places your house on a flood plain after the closing. You must comply or the lender will buy it at an inflated price for which you will be billed.

Private Mortgage Insurance (PMI) Disclosure: If PMI is required on your loan and you pay a monthly premium, Federal law grants you the right to terminate the policy under certain conditions. The conditions are spelled out in this document. You will want to terminate your PMI as soon as you meet the requirements, but that will take at least 2 years.  

Having identified the junk documents that do not require your attention, educational document s that can be read at your leisure, and future use documents that require only to be set aside, you have completed the easy part of the closing process. The difficult part is the transactional documents that indicate whether or not you are actually getting the deal you negotiated or were promised.

 Transactional Documents

The documents discussed above dealt with the relatively easy parts of the closing process: junk documents that require little attention, educational documents that can be read at leisure, and future use documents that require only to be set aside. The challenging part of the closing process is perusing the transactional documents that indicate whether or not you are getting the deal you believe you negotiated or were promised.

This is the most challenging part of the process because the stakes are high, and  the time pressures severe. The transactional documents that define the terms of the deal are subject to change as the transaction moves toward closing, but it is only the final set of documents that matter. In the typical case, the first disclosure is sent before the borrower’s property is appraised, and before the loan terms (interest rate and points) are locked. This usually results in a second disclosure following receipt of the appraisal, a third disclosure when the loan is locked, and sometimes a fourth disclosure if the loan terms change for some other reason. 

In theory, you should have access to final documents 24 hours before closing, but very frequently the lender can’t comply except by delaying the closing by 24 hours, and that could violate either the rate lock agreement or the transfer date on a home purchase. You may have no alternative but to check the transaction documents at the closing table.

The focus of your examination should be three documents that contain the loan prices and other critical features of your loan. You want to assure yourself that the deal you are getting is the one you negotiated to receive. If you find something amiss, you can use the time pressure to your advantage by getting it fixed on the spot.

Settlement Statement (HUD-1): The deal you are getting is shown on the HUD-1 in your closing package. The deal to which you agreed is shown on the last version of the Good Faith Estimate (GFE) you received from the lender, which you should bring to the closing with you. Relevant items on the HUD-1 show the corresponding entry on the GFE for easy comparison. For example, total fees due the lender are shown as Item A on page 2 of the GFE, and as line 803 on the HUD 1. They should be exactly the same.

Truth in Lending (TIL): The TIL is replete with garbage disclosures that should be ignored, but it also has important disclosures about your loan, which are all on page 1.  

*The “Interest Rate and Payment Summary” should correspond to  “Summary of Your Loan” on the GFE.

*Note the “Late Charge”.

*Under “Prepayment”, if the first box is checked, you will pay a penalty if you pay off early.

*If “Demand” is checked, the loan probably has a balloon payment, meaning that the remaining loan balance must be paid in full at some date. The TIL does not indicate the date, but the GFE does – it is the last item under “Summary of Your Loan”. If “Demand” is checked but there is no balloon shown on the GFE, you must find the entry in the note to see the conditions (if any) under which the lender can call the loan. If the right to call the loan is unconditional, demand that it be removed.

Fixed/Adjustable Rate Note: This important document spells out the terms of your loan, which should correspond exactly with those in the HUD1, the TIL, and the last GFE. Check the Interest rate and initial payment, and if it is an ARM, check the period until the first rate adjustment.

If your loan carries private mortgage insurance, the premiums should be checked. On monthly premium plans, the premium is included in the monthly payment shown on page 1 of the GFE, and again in item 6 on page 2. Upfront premiums are shown either in item 6 or item 9. On the HUD1, monthly premiums are shown on line 802, and upfront premiums on line 1003.

Item 303 on page 1 of the HUD-1 shows the total cash you need to close. If there are no issues connected to the amount, you must provide a certified check for that amount. 

Note that the difficulties involved in monitoring changes in the transactional documents would be substantially reduced if lenders reported the reasons for change whenever they issued a new set. In August 2015, the GFE and TIL will be replaced by a single Loan Estimate developed by the Consumer Financial Protection Bureau (CFPB), but lenders will continue the practice of changing the deal and issuing a new disclosure without explaining why. I have asked CFPB why they are not making the closing process significantly easier for borrowers by requiring lenders to explain why the terms of a deal have changed, but there has been no reply.