CFPB: E-Closings Improve Borrower Understanding Of Mortgage Terms

Posted by Patrick Barnard on August 05, 2015 No Comments
Categories : Residential Mortgage

A study conducted by the Consumer Financial Protection Bureau (CFPB) as part of its e-closing pilot reveals that borrowers who close their loans using an electronic platform generally understand the terms of their loans better than those who only use paper forms.

The study was conducted as part of the CFPB's ‘Know Before You Owe‘ e-closing pilot, in which the bureau is exhaustively studying the pros and cons of all-electronic closings for consumers.

‘While technology alone will not address all consumer concerns in the closing process, our study showed that e-closings do offer the potential to make the process less complex,’ says Richard Cordray, director of the CFPB, in a release. ‘We expect this pilot project and its findings to help inform further innovation that will be a win-win for consumers and industry alike.’

Last year, the CFPB released a report showing that borrowers often felt as if they did not have enough time to review important documents during the closing process. Further, borrowers often felt overwhelmed by the stack of complex paperwork, the report revealed.

The CFPB's ‘Know Before You Owe’ initiative is designed to address these concerns. A major part of the initiative involves combining the existing mortgage disclosure forms into two, streamlined disclosures that are simpler for borrowers to read and understand. The new loan estimate form must be delivered to the borrower within three business days of the lender receiving an application, thus giving the borrower an opportunity to better understand the terms of the loan and giving him the ability to shop around for a better mortgage, while the new closing disclosure, which explains the terms of the loan in detail, must be delivered at least three days in advance of the closing.

One of the benefits of using electronic documents in the mortgage process is that it allows for faster delivery of the documents and embedded links to help consumers understand specific terms as they come across them, the CFPB says. E-closings also make it simpler to provide borrowers with educational tools that can help them navigate the closing process more successfully, the bureau claims.

The e-closing pilot took place over a four-month period and involved seven lenders, more than 3,000 consumers, four technology companies, and many settlement agents and real estate professionals, the bureau says in a release. Some consumers used traditional paper documents, and others completed the process using only electronic documents. A third group used a mix of electronic and paper documents.

After each closing, participants were asked to provide feedback on specific parts of the process. For example, the CFPB asked consumers whether they understood the terms and fees and, further, whether they understood the justifications for any differences between quotes and final costs. Based on the responses, borrower understanding of the loan being offered improved measurably compared to a traditional closing using paper documents. Borrowers also said the e-closing process was significantly more efficient compared to a traditional closing using paper documents.

What's more, most borrowers said they felt as though they had more control over the mortgage process, mainly because they had more time to review documents, ask questions and flag concerns. In fact, most borrowers said they took the time to review their closing documents in advance of the closing meeting. This was regardless of whether the paperwork was received electronically or through paper copies, although the CFPB believes using an e-closing process can facilitate faster document delivery.

In its release, the CFPB claims that although e-closing technology has been around for years, lender adoption has been slow. The bureau, however, does not state in its release how many lenders are currently using e-closings – a number that will likely dramatically increase after the CFPB's new ‘Know Before You Owe’ forms and rules (also known as the TILA-RESPA Integrated Disclosure, or TRID, rules) take effect on Oct. 3.

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