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.
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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 (APR), 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 previous system of disclosures, you couldn’t be certain about your final expenses, and the Good Faith Estimate didn’t even tell you how much you’d need for 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.
Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says barely 5 percent of his clients are using the Loan Estimate to comparison shop, while 95 percent “are doing it the old way.” Seattle area mortgage banker Charley Murphey told me he has “heard of no borrowers walking away with a Loan Estimate in hand to go shopping for a better deal.
Joe Adamaitis, vice president and residential lending manager for Insignia Bank in Sarasota, Florida, says “buyers do not have the time to shop due to the pressures of meeting commitment and closing dates. Most lenders are priced the same and it comes down to which lender the Realtor referred them to.”
Wendy Helms, a real estate agent with Redfin in Chicago, noted that some local real estate contracts contain standard time deadlines for nailing down financing that conflict with the Loan Estimate’s 10-day shopping period. In the Chicago area, buyers who sign contracts on houses generally have five days to shop and apply for a mortgage. Since most of her clients are pre-approved by a lender anyway, the shopping effort happens before any Loan Estimate is issued. Helms estimates that roughly three quarters of buyers stay with the lender who issued the pre-approval. They receive a Loan Estimate from that lender but most don’t use it to shop further.
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.”