Mortgage-document deluge: Do the new rules help?

For years, the Consumer Financial Protection Bureau worked to integrate the mortgage-loan disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act of 1974.

The bureau's work, done under the TILA-RESPA Integrated Disclosure Rule, or TRID, resulted in new requirements that went into effect in October.

One major goal of the overhaul was to help borrowers understand and cope with the deluge of documents they must read and sign prior to closing on a mortgage.

This article will consider how and where the bureau succeeded or fell short, as well as suggest a complementary approach that should make it easier for borrowers to cope with the deluge.

Dealing with disclosures. For decades, mortgage borrowers had to cope with irreconcilable disclosures mandated by the U.S. Department of Housing and Urban Development and the Federal Reserve. There was no way for a borrower to match the figures on the Good Faith Estimate disclosure mandated by HUD with those on the Truth in Lending disclosure mandated by the Fed.

Among other things, the Consumer Financial Protection Bureau was directed to combine those disclosures, which it has done in a new document called the Loan Estimate.

As with the disclosures it replaces, the Loan Estimate must be provided to the borrower within three business days following the submission of a mortgage application. Though the document is far from perfect, it is far better than what it replaced.

Identifying providers. Now given to borrowers at the same time as the Loan Estimate is a list of third-party services and service providers, divided into two groups. One lists services for which the borrower can shop, either from the firms named or others; the second lists services that must be purchased from the firms named.

Of course, lenders that have a financial interest in a third-party service provider will list that provider in the second group, which makes a referral to that provider automatic.

Why is Consumer Financial Protection Bureau strengthening one of the least savory features of this market?

Allowing more time for study. TRID also has a new closing disclosure, which replaces the old HUD-1 disclosure. Though the form is much the same, the new disclosure must be received by a borrower at least three business days before closing.

Previously, a borrower had only one day to study the documents received at closing. Some recent surveys indicate that more borrowers are reading the disclosures before closing.

However, the bureau controls only a few of the documents contained in the typical closing package; the remainder are required by other federal agencies, states, and the individual lender dealing with the borrower. Each entity is focused on its own disclosure - how it fits into the total package is ignored.

TRID does not address this fundamental problem. The key to making the package of closing documents manageable to borrowers is to classify them into different groups that call for different treatment.

How to classify the documents better? Divide the package the borrower receives into four groups. Only one requires the borrower's careful scrutiny immediately before or at the closing. Possible categories are as follows:

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

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

Documents that may become relevant in the future and should be accessible, but for which no time need be expended at or before closing.

Transactional documents that contain the details of the mortgage loan, which probably changed during the loan-processing period. Those require the borrower's full attention subject to the greatest time pressure.

A major reason for identifying the first three categories of documents is to reserve as much time and attention as possible for examining the fourth.

Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. http://www.mtgprofessor.com.