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The Consumer Federal Protection Agency has as its primary purpose protecting the consumer from high risk and unfair practices in consumer lending. In other words they are issuing rules and regulations to lenders that protect the consumer from economic loss or other injury as a result of a violation of Federal consumer financial law. As a result mortgage lenders have been inundated with new consumer disclosures, requirements and calculations. As of January 10th, lenders and all related entities involved in the loan origination process must meet certain parameters in order to ensure that the loan underwriting and fees meet the CFPB requirements. While the concern in protecting the consumers is an admirable one, there is no one that was in the business from the late 1990s to 2008 who does not understand that the consumers were also part of the problem. So if lenders and related entities are dealing with the ramifications, isn’t it fair that we ask what is being addressed with the consumers?
In looking back there were three major problems that were the primary consumer involvement issues. The first of these was the general run-up in housing prices. Consumers were frenzied at this time with the opportunities associated with selling their properties. Since home values had escalated so much homeowners saw this as time to sell and then use the proceeds to buy the next, bigger and better house. Most never worried about paying the mortgage since with housing prices rising so fast, they could always refinance or sell. Many consumers also became enamored of the idea of becoming a rich real estate investor and were seeking out properties which they could buy, fix-up or not, wait 6 months and sell for a nice profit.
Then there were those consumers who just didn’t really understand the process and didn’t take the time to read the documents or ask questions. These individuals, whether it their first foray into the world of mortgages or their tenth, just wanted to get a house where the mortgage payments were affordable. They really didn’t understand negative amortization or other financial language, nor did they read any of the disclosures that were provided over and over to them. All they wanted was to get into the homeownership arena. The rest would work itself out.
Finally, there were those consumers who took advantage of the products that were being offered and basically used the stated income application process to secure loans on false information. While there is controversy over who all was involved in the deception, there is no doubt that many of these borrowers were aware of and had agreed to submit the false information.
Addressing these issues is not necessarily the role or the responsibility of the CFPB, but they have included in the new regulations requirements that address the need for borrower awareness and education. The new requirements are primarily for first time homebuyers who are using high cost financing to obtain a mortgage. For these loans a High Cost Mortgage Certification of Homeownership counseling is required. The counseling cannot begin until after the applicants have received their RESPA disclosures and the counseling cannot be performed by an affiliate of the creditor.
If the loan is subject to RESPA then the lender must supply a list of homeownership counseling organizations to the borrower within three days of application. In other words, this new document must be considered one of the initial disclosures provided at time of application.
Other than these requirements, the consumer issues are left to loan originators to handle. In order to gather information on how to make sure the consumer understands the loan program they are entering into as well as ensuring the consequences of supplying fraudulent information, we asked several loan officers to give us some of the tips and techniques they use in their day to day meetings with potential borrowers.
Bob Clinton, a Senior Mortgage Banker at Group One Mortgage in South Florida willingly shared how he builds trusting, strong relationships with his borrowers. “It’s all about transparency and open, clear communication”, he offered. He also advised that the loan officer should “ask questions, questions and more questions.” Bob believes that the relationship between the borrower and the lender should be one of trust, building a strong relationship, being honest and clear on communication. He sees the role as an advisor/guide to the borrower. “It’s the responsibility of the loan officer to compile a list of questions to ask of the borrower as the loan process moves along. The expectations of the borrower and the expectations of the loan officer need to match. People want to be informed and like to do business with people they like and they trust. The best customers are referrals who are expecting the same level of professionalism and trust they have with who referred them,” summarizes his overall thoughts on the subject.
Other loan officers shared that making the consumer aware that complete information for the pre-approval process has to be provided by the borrower and is best done as soon as possible. Knowing that they will need to provide complete tax documents and/or income documents for all their employment precludes surprises later on in the process. Stressing the importance of providing accurate and complete information when discussing this with applicants was reiterated by several loan officers we talked to. If a borrower is self-employed they need to explain exactly what it is that their company does; in other words what are their products and services. They have to disclose any side businesses they are involved in as well, even if it is not their primary business. Letting self-employed borrowers know how they are evaluated and how their income will be calculated will go a long way in helping them understand why so much information is needed.
Borrowers also need to understand what they are obligating themselves to by thoroughly reviewing the loan documents. It is especially important that they read the initial disclosures including the revised TIL/GFE document. They should make notes of items they do not understand or language they are not familiar with and either get the loan officer to explain it or hire an attorney familiar with mortgage lending.
Realtors have a responsibility in the transaction as well. They must focus on giving the borrower feedback on their qualifications and helping them with a plan that can get them approved for a loan. Steering buyers to homes in which they are not qualified just for a bigger commission is not appropriate or helpful to the borrower or lender. The Realtor can’t just be a listing agent or buyer’s representative. They too have responsibility in helping the borrower get into the residence they want and can afford to buy seeing themselves as a partner with the mortgage company and ensuring the borrower is educated and aware of the obligation they are undertaking.
The loan officers we talked to strongly emphasized that surprises later on in the loan process have to be avoided. Loan files having to be re-submitted, delays in the closing process, lost deposits and additional scrutiny on the loan file are consequences of not doing the job right in the first place. The homebuyer needs to understand their contract. To understand the contract, they need to read it through thoroughly and hire a quality, trusted attorney who will represent them. Signing the documents before hiring an attorney is too late. They need to have a relationship with an attorney to get good advice before the closing.
Loan officer Bob Clinton also shared that loan officers need to probe the borrower with questions and help them through the process by consulting and educating them. “It is critical that the loan officer sees him or herself as an advisor and not just someone selling them a loan,” he offered.
One of the more recent issues faced by many loan officers is dealing with buyers who are part of the millennial generation. These Gen Y borrowers tend to rely on communication through text messaging which can also be a problem if the loan officer isn’t use to texting. To address this Bob asks his borrowers what method of communication they prefer. This way he knows upfront how best to reach out to them. One issue that may make the communication and education process more complex is that the millennial generation are very confident buyers, very busy in their day-to-day lives and want the information sent the fastest method possible. In response they want to provide information as quickly as possible even if it isn’t what was needed. A good example is bank statements. When asked for these, they typically send bank transaction pages. It is only after the requirement and need for full bank statements is explained to them that they finally send the statements.
The loan officers we talked to also go beyond just the specifics of the loan application. Most of the time they explain other aspects of the process as well. For example, they may explain the need for a loan preapproval and how it impacts the buyers’ ability to get the home they want. Another area that has always been left out of these conversations is the reason behind title work and how it can protect them as well as the lender if they choose. Understanding how and why the survey is done, the need for homeowners insurance and the impact of escrows on their overall payment is important information, especially for first time borrowers. Good loan officers also go over the appraisal report answering questions and helping the borrowers understand what that number really means. Of course, the need for explaining what cash is needed for the closing and the fees charged is of vital importance and can be wrapped into the explanation of the TILA/GFE disclosure. Helping applicants understand the responsibilities of the lender and the realtor and what part each plays in the process is often confusing and a good loan officer fills in that information as well.
Overall, the loan officer provides a tremendous amount of information and is the applicants’ best source of knowledge for the borrowers. To sum it up, Bob stated, “if borrowers want a happy experience, they need to find a loan officer who is going to build a long-term relationship and offer them good advice.”
At the end of the day, being the lender means that we have voluntarily taken on the responsibility of ensuring that our customers, the consumers understand their loans and their responsibilities as well as monitoring their information to ensure its accuracy. While some may see this as a burden, there is a huge opportunity for the lenders. They can become partners with borrowers and realtors while educating them on all aspects of good quality lending practices as well as ensure that the regulation requirements take hold in all facets of the industry. There are huge business opportunities for the lending community to be involved in the education process for the borrowers and realtors; a value-added service that will increase business and relationships for the lenders who embrace this opportunity.