Thank you all for joining us today. We have convened this forum to discuss one of the most significant, yet stressful times in the lives of consumers – mortgage closing time. Mortgage closing comes after the neighborhoods have been scoured. Schools have been evaluated. Countless websites have been perused. Wish lists were made and deal breakers considered. But finally, a home has been found. An offer was made and accepted. The consumer has applied for and been approved for a mortgage – hopefully after careful shopping and thoughtful evaluation of the future. Now it is down to the final hours before the consumer can take ownership of the new home, and standing between the consumer and those keys is a mountain of paperwork.
The paperwork may be full of legal jargon and seemingly senseless acronyms. In the words of one consumer, “the print is font-size ‘flyspeck’ and the language is boilerplate.” Without a doubt, the mortgage closing process is complicated for everyone involved and is most stressful of all for the homebuyer.
At the Consumer Financial Protection Bureau, we are working hard to improve the homebuying and homeowning experience for consumers. We know a mortgage is often the biggest financial commitment that people will ever make. We also know that it is much more than just a financial transaction – it creates a special place to establish roots, to share with family and friends, and to take refuge. It becomes closely tied to one’s identity – a place of one’s own – not simply a house, but a home. It also marks a rung on the economic ladder – a key step toward improving one’s lot in life.
Knowing this, we have taken action to address problems in the mortgage market and protect consumers. We saw too many people slip back down the economic ladder when the financial crisis hit. The collapse of the housing market destroyed businesses and jobs across every economic sector and in communities all across the country. The American dream of homeownership was shaken to its core. Home values plummeted. Household wealth shrank. And the effects still haunt our economy today.
Central to our mission at the Consumer Bureau is promoting stability in the marketplace to help ensure that such a crisis will never repeat itself. So last January, we implemented new rules to improve the functioning of the mortgage market. We took a “back-to-basics” approach founded on three main tenets. No debt traps. No surprises. No runarounds. Our rules prevent creditors from extending loans to consumers who lack the ability to repay them, require new disclosures, and mandate better customer service.
In November, we took further action to improve the mortgage experience for consumers. We finalized a rule requiring easier-to-use mortgage disclosure forms that clearly lay out the terms of the mortgage for a homebuyer. In fact, just this week, these new forms led to the Bureau winning the Center for Plain Language’s Grand ClearMark Award for clear, concise communication. The forms were selected from a range of submissions from private industry, nonprofits, and other government agencies. The new “Know Before You Owe” mortgage forms will replace the existing federal disclosures and help consumers understand their options, choose the deal that is best for them, and avoid costly surprises at the closing table.
The goal of all of these efforts is to give greater control to consumers, so they can take charge of the decisions they are about to make and take a more active role in their closings. Today’s discussion of the closing process is the next step in our Know Before You Owe initiative. We are unveiling new research on the challenges that consumers face in the closing process and identifying potential solutions. One of these potential solutions may be found in the eClosing pilot project that we are announcing today, and you will hear more about that in a few moments.
But first we can motivate the topic by offering more detail about people’s real-world concerns. Mortgage closings are often fraught with anxiety. In December, with an eye toward improving the closing process for consumers, we sought comments from the public on the pain points they have experienced in the mortgage closing process. We heard about three main challenges: lack of time, too much paperwork, and forms that are complex and confusing.
The first issue we heard about was that consumers are very frustrated by the short amount of time they have with the closing documents. Most often, consumers do not see the paperwork until they arrive at the closing table. They feel pressure to rush through the paperwork and sign without understanding the terms of the deal. In interviews, we heard that many consumers said they do not manage to read most of what they are signing. Even those who said they start off reading the documents confessed that they stop reading by the end of the stack.
As one consumer put it, “Whatever they were putting in front of me and explaining, I just signed.” Of those who did read the documents, one borrower told us, “When I showed up and announced that I was going to read all of them, I received eye rolls from the assembled attorneys and real estate agents.” Such a substantial financial commitment should not be treated this way.
Fortunately, we have already taken action here to help consumers. Starting in August 2015, consumers must receive their Closing Disclosure at least three business days before they actually close on the house. And we put in place new protections that prevent lenders from changing the terms of the deal by the time consumers get to the closing table. But the Closing Disclosure is just one of the documents included in the stack of paperwork. We want consumers to have plenty of time to review all of the documents and raise any questions they may have.
The ability to spend time with the closing documents is one challenge we heard about; another is the huge amount of paperwork. The sheer volume of the documents can be overwhelming, especially coupled with the short timeframe. On top of that, the volume varies from transaction to transaction because closing documents and practices are not uniform. Two people could be closing on the same type of loan, for the same amount, in the same location, but one may only have 40 pages of documents while the other has 100 pages or more. The only difference may be the lenders they use. In some closing stacks, we found that a number of documents were actually added by the lender.
Some of these forms are intended to help consumers better understand the costs and risks of their mortgages. Others were devised by lenders as defensive measures to minimize the prospects of future litigation. Still others represent federal, state, and local government requirements, some of which may have become outmoded. The undeniable result is information overload: people find that there is just too much to absorb during the closing process, which may cause them to shut down. Industry members agreed as well. One settlement agent told us “there are far too many redundant papers and it is overwhelming for most borrowers.” There is so much to digest in the stack of paperwork, and so little time to go through it, that many borrowers do not even bother trying.
Those who do try to read all the documents face a third challenge – a lack of guidance in how to understand them. The closing stack is full of impenetrable legalese and jargon. The terms and acronyms are foreign to most consumers, like they are reading another language. But many consumers complained that they had little help from the others in the room. One consumer gave this account of dealing with a settlement agent: “Sometimes when I asked for an explanation of a form, [he] would blow through it.”
As a result, homebuyers end up signing documents without properly understanding or evaluating the most critical information. One homebuyer simply said that the stack of documents “felt like you’re signing your life away.” These new homeowners leave the closing table with a whole new level of anxiety, as they find themselves wondering what was buried in the stack of paper that may create some nasty surprises in the years ahead.
We are convinced that we can make important improvements in the closing process. Our new Closing Disclosure form helps address some of these issues because it is shorter and consumers have told us that it is much easier to use and to understand. We believe the eClosing process may allow this form to stand out even more for consumers than if it is buried somewhere in a mound of paperwork. But more needs to be done in the long run as well. The Consumer Bureau itself has authority only over a few of the forms in the closing stack. The rest will require other stakeholders to make a commitment to help effectuate change. And everyone involved needs to embrace the central idea that consumers should feel empowered and not undermined by the closing process.
So as part of our Know Before You Owe initiative, we are making a commitment to work with the various stakeholders to use technology in order to improve the mortgage closing experience for consumers. We strongly believe that electronic closing solutions – known as eClosings – can lead to more knowledgeable consumers and a much better process for everyone involved.
There are several ways that eClosings can pave the way for a more efficient process that is also more empowering for consumers. Electronic documents can make early delivery more convenient and simple – giving the consumer time to read the documents, consult with family members or professionals, and ask the lender questions. Electronic documents can also provide an opportunity to embed links to educational materials for consumers, allowing them to reference these materials while they are reviewing the documents both before and during the closing. And shifting to an electronic process should lead to greater consistency and accuracy, since automated processes can make it easier to detect discrepancies. We have heard repeatedly that errors and delays are a big source of consumers’ frustration, so anything that can be done to mitigate that problem is a welcome change.
By spurring the adoption of eClosings, we can also reduce costs. It is faster to send documents between lenders, investors, and other stakeholders electronically than it is to send these documents by mail or other means of delivery. The time saved can translate into tangible monetary benefits for lenders. According to a leading title company, a typical mortgage closing generates about 6,000 pieces of paper across all stakeholders from start to finish. The paper and storage costs for this title company alone amount to $20 to 30 million annually – costs that can be significantly reduced through automated processes. As this particular organization is moving to electronic documentation, their annual paper and storage costs are steadily being reduced. Some of these potential cost savings can and should be passed along to consumers.
But we also know that innovation can create new risks, just as exotic new mortgage products helped precipitate the financial crisis. So we do not want innovation to come at the expense of consumers. Any electronic closing process that diminishes their ability to act in their own self-interest will raise serious concerns for us. Merely switching to an electronic process may not increase the amount of time consumers spend reading and understanding the documents; instead they may simply click through the documents, just as they typically skim through the closing stack. But we aim to incentivize eClosing processes that will give consumers the opportunity to review documents in their home in advance, along with educational materials to promote greater understanding, while still retaining the option of reading them at the closing ceremony, where the final and most crucial decisions are ultimately made.
We have heard some concerns about data security and the risk of fraud with people using eSignatures that are not their own. Nevertheless, the federal government and every state have weighed the same concerns and adopted laws that approve the use of eSignatures. We would also be concerned if eClosings meant that consumers could not freely and easily access a full record of the documents they signed. But there is no obvious reason why this should be a problem and lenders can easily establish a repository of electronic documents for each closing. Finally, this process should not be designed in ways that deprive the consumer of control over decisions and judgments that might have to be made at the last minute about this life-altering transaction at the closing table.
In short, we want to encourage an eClosing process that helps consumers rather than harms them. We are committed to working with industry and consumer advocates alike to find the best way forward. Over the next fifteen months before our Know Before You Owe rule goes into effect, we are proceeding deliberately by launching a pilot project. Some lenders are already offering eClosing solutions. We plan to work with them to explore how we can best facilitate and secure the benefits of this new and improved approach.
Today we are releasing the guidelines for our eClosing pilot program, which we will launch in the coming months. The pilot program will assess and advance electronic closings and test our vision for additional educational tools that can be incorporated to benefit consumers. Our goal will be to determine how the eClosing process can be made to reflect the spirit of our Know Before You Owe rule by generating increased consumer understanding, fewer surprises at the closing table, and a more empowered consumer. This is not a rulemaking process. Instead it is a potential “win-win” effort to work with all stakeholders to ensure that consumers understand the commitment they are making and experience a more transparent, efficient, and effective process.
To help manage the scope of the first phase of our project, participants in the pilot program must already have a process in place and be currently offering an eClosing option to their customers. Those who are interested should begin by reviewing today’s guidelines and the procurement document, known as the Broad Agency Announcement, for details on how to apply.
On our end of the program, we plan to test educational tools along with materials like document summaries, term definitions, process explanations, and checklists that consumers can review prior to the closing. We want to see what helps consumers become more informed and in control of the process. We also want to know whether the order of the documents changes the consumer experience.
We are interested in studying and testing the various technologies that would let consumers see the entire package of closing documents ahead of time. Ideally, they would receive the complete set of materials at least three business days before closing. We want to know how spending extra time with those documents affects the process. Do consumers feel less pressure? Are errors less common? Does the process create more satisfaction for each of the stakeholders?
As we address these questions, we plan to identify best practices that we can share industry-wide to the benefit of consumers. We will use the results of the pilot program to foster a high-quality dialogue about the merits of eClosing. The program should get underway sometime this fall.
The mortgage and real estate markets involve many players, so we will need to work together to bring about the positive change that we are envisioning today. I would also like to take a moment and applaud those agencies and officials who are already finding ways to make the closing process easier for consumers. From their efforts to allow electronic signatures, to offer affordable loans, and to counsel potential homeowners, they are playing an instrumental role in this process and we are glad to have the chance to work with them to deliver value for American consumers.
From the first days of the Consumer Bureau, our Know Before You Owe project reflected our deep commitment to making markets work better for consumers, for responsible providers, and for the economy as a whole. The vision we all share is to build a sustainable marketplace in which consumers can once again put their trust. We know how much they deserve it, and we look forward to our discussions today to see how we can do just that. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.