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CONSUMER "CONFUSION" LEADS TO HIGHER LOAN CLOSING COSTS

Yesterday, the United States Department of Housing and Urban Development released a study conducted by the Urban Institute that suggests that "[m]any American consumers overpay by thousands of dollars in total closing costs when they purchase their homes. There are significant and unsupported variations in loan charges, title fees and other closing costs charged to unsuspecting (most typically minority) home buyers.

The study found significant disparities in closing costs even when it compared borrowers with identical credit scores, loan terms and mortgage amounts. Variations appeared to be based on education level, geography, race and ethnicity.

Of course, in an information-era, free market system this shouldn't happen. HUD mandates that all mortgage loan applicants receive two critical documents: a "Good Faith Estimate of Closing Costs" and a "Truth in Lending Disclosure Statement" (the "TIL") that should enable consumers to compare the costs of any given loan program to any other, by showing (a) projected closing costs and (b) the APR, which in turn can demonstrate the impact those closing costs have on a loans "effective" interest rate.

This information is critically important to a consumer trying to choose a given lender or loan program, but I fear that most people have no idea what the TIL means. At closings, I am prone to mis-identify it as the "Confusion in Lending Disclosure." Frankly and without only a few exceptions, the only clients who grasp its meaning before we review it are bankers, financial analysts, and the occasional accountant.

For what its worth, HUD recently proposed a revised format for the good faith estimate. At first blush, it looks pretty cool, but go on and take a look at it. Let me know if you think it makes things clearer or murkier. I just have my doubts that most people will read through to the end...

Some of the key / startling statistics (and my snide observations):
  • Total loan fees can vary by thousands of dollars from borrower to borrower even for the same loan amount. (Yes, unscrupulous loan officers will charge what they can get away with. High quality loan officers just do not do this, but the key is in finding an honest broker)
  • Loan charges and title fees vary considerably from state to state even for similar loans. Even in the same state, disparities in title costs among identical borrowers can be more than $1,000.(Strict office policy in my practice to guard against title company "mark ups" - another reason why I cannot conceive of going to closing without an attorney)
  • On average, borrowers see no reduction in out-of-pocket fees when they agree to higher interest rates. Ideally, consumers ought to receive a dollar-for-dollar credit for paying a so-called "yield spread premium" that results from agreeing to a higher interest rate loan. In fact, many borrowers see no reduction at all and even pay more in total loan fees. (Yikes!)
  • African-American families pay an average of $415 more in total loan origination fees than non-minorities.
  • Hispanic borrowers pay an average of $365 more in total loan origination fees than non-minorities.
  • Consumers obtaining loans for which comparison shopping is easiest, so called "no-cost loans," enjoyed an average cost savings of $1,200 (it just does not really matter to most people what any closing cost is called - its easier to compare competing loans by "bottom lining" those lender-charged closing costs, anyway.
  • On average, borrowers who completed college are charged $1100 less than borrowers who did not go to college at all, other things equal. (thanks for pushing me, mom & dad)
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