In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which then-President Barack Obama signed into law. The law, often referred to as the Dodd-Frank Act, created the Consumer Financial Protection Bureau (CFPB).
“Part of the purpose of creating the Bureau,” says Yatin Karnik, Founder and CEO of Confer, Inc., “was to increase accountability in government by consolidating consumer financial protection authorities that had existed across seven different federal agencies into one. Consumer financial protection had not been the primary focus of any federal agency, and no agency had effective tools to set the rules for and oversee the whole market.”
As Karnik explains, the result was a system without effective rules or consistent enforcement throughout; the effects of which were seen and felt by many both in the 2008 financial crisis and in its aftermath. With the Act being signed into law, however, instead of important consumer protection powers being scattered across the federal government, a single entity would now have the oversight authority to make sure consumer financial markets work for all potential borrowers equally.
Why do we use a Loan Estimate (LE)?
Title X of the Dodd-Frank Act created a new Bureau of Consumer Financial Protection within the Federal Reserve Board. The intention is for the Bureau to act both as a new supervisor for certain financial firms as well as a rule-maker and enforcer against unfair, deceptive, abusive, or otherwise prohibited practices relating to most consumer financial products or services.
As part of this intention, the CFPB introduced a new Loan Estimate (LE) form as part of its standard mortgage loaning practices in 2015. The three-page form provides borrowers with information including, “…the estimated interest rate, monthly payment, total closing costs for the loan…information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.”
According to the CFPB, “the form uses clear language and design to help you better understand the terms of the mortgage loan you’ve applied for. All lenders are required to use the same standard LE form, which makes it easier for you to compare mortgage loans so that you can choose the one that is right for you.” However, as Karnik explains, the only real clarity provided to borrowers from the CFPB on LEs comes from the form itself, rather than the information in it.
“While the form itself is now standard practice for lenders through the CFPB,” Karnik tells us, “the CFPB is unable to standardize the information, costs, terms, and other details that may vary between different lenders. Unfortunately, the LE form is not so clear that there isn’t a need to compare loan estimates between lenders on behalf of borrowers.”
How does a lack of conformity create predatory lending practices?
As Karnik explains, the strongest need for borrowers seeking LEs from lenders is conformity in the information provided to them from each LE form. This is made difficult, however, due to a distinct lack of tools for borrowers to do so. Unlike other services, such as shopping for and obtaining healthcare through healthcare.gov, there is no unified marketplace for borrowers to compare different LEs available to them.
“All lenders are required to use the same LE form,” Karnik explains, “however, how confident can we be that all lenders should also be required to fill out these forms consistently for each borrower? Without any proper checks in place for this, the answer is: ‘not very’.”
Currently, the best way for borrowers to compare several different LEs comes from advice provided by the CFPB itself, which instructs borrowers to “ask each lender for the same kind of loan with the same features,” including factors like loan and rate type, the amount and term of the loan, as well as any potential credits or rate lock periods of the loan.
“The caveat to this practice is that a lack of conformity tends to create predatory lending practices,” Karnik tells us. “For example, some lenders might include a ‘service charge’ or ‘courier fee’ of roughly $250 to provide borrowers with their LE document within 3 business days. Other lenders may cover this fee entirely or refer to it as something else entirely.”
According to Karnik, both the fee — as well as the reason for charging it — are not regulated by the CFPB. As such, lenders are not properly monitored or reprimanded for these predatory lending practices.
“This makes it all the more difficult for borrowers to truly compare the mortgage LEs provided to them by lenders. Without proper tools available for borrowers to seamlessly compare the similarities or dissimilarities between two or more LEs, there is essentially no way for borrowers to compare the full costs or services offered to them by lenders, including which costs or services might be mandatory or optional.”
Indeed, the lack of conformity regarding the information contained within LEs presents a need for tools borrowers can utilize to compare those LEs apples-to-apples. In creating such a tool, akin to an online consumer marketplace that makes comparing LEs more simple to borrowers, lenders can then work more collaboratively with borrowers in creating finalized LEs that are mutually agreeable and beneficial to both parties involved.
