DISCLOSURES: CLEAR AS MUD
Focus on the relative value of disclosures.
While talking with
someone recently about the predatory lending problem they raised the
question about disclosures, specifically, how could a consumer not be
aware of the various harmful components of the documents they
signed. How could they claim they did not know there was a prepayment
penalty, no escrow provision for taxes and insurance and a possible
balloon payment? A reasonable question would be, “didn’t they sign the
proper disclosures on this loan?” Of course, the answer is, yes, they
did. In the case of a
predatory situation where the intent of the transaction is to take
unfair advantage of the consumer, there clearly is no real intention to
help them understand the paperwork. These transactions usually involve
a re-finance loan with a Sub prime lender and no real estate practitioner
is involved.
This discussion
led me to spend some time focused on disclosures; What purpose do they
serve? Who benefits? Are changes in order? A typical transaction
includes disclosures on : agency relationship, right to inspection, lead
paint, affiliations, truth-in-lending, planned unit development,
mandatory homeowners association, mortgage broker agreement and fees,
tax exemptions, terms of the note, right to a copy of the appraisal and
more. Several of these disclosures are rather simplistic but most are
more complex and more likely to confuse than clarify.
In transactions
with reputable lenders involving reputable REALTORS® I wonder how often
consumers sign disclosures where they fail to grasp the essence of what
is being disclosed. As an experienced agent, sadly, I suspect that real
estate documents were not created to be “understood”. Most agents would
probably be overjoyed if their clients grasped the “essence” of what was
being relayed to them. There is a growing number of REALTORS® becoming
frustrated
because someone with whom they have worked has signed papers with a
lender or builder without understanding what they had
signed. The
consumer seeks advice from the REALTOR® AFTER they signed the paperwork
because
they now realize
that they need help. One could make a good case that the purpose of
disclosures seems to be to protect all parties from legal action without
a committed effort to help the consumer make a more informed choice.
As real estate
professionals we have all been taught to be sure we have the proper
signatures on all disclosures. We all understand whether we have been
told by company attorneys or not that a major concern is to avoid
lawsuits. Has there been an equally concerted effort to be sure our
clients KNOW what the disclosures mean? Do we KNOW what the typical disclosures
mentioned above mean? Could you explain each of them if you needed to?
In our hurry up
world I humbly submit the possibility that slowing down the process
could be beneficial, used as an opportunity to provide valuable
education to our clients and another agent/client “bonding” experience.
If closing documents were provided 24-48 hours prior to closing for
review instead of our current practice, then the agent and client would
have the chance to go over the paperwork and all important disclosures
could be re- viewed at this time. It is not enough for all parties to
rush a client because of THEIR schedule and say “this is the variable
rate disclosure, you need to sign here.” The consumer has been given a
directive and no real disclosure occurred.
I can appreciate
that this might cause some discomfort to many REALTORS® who themselves
have not learned what the disclosures really say and therefore could not
adequately explain it to their clients. Accustoming to leaving the
details of the transaction to the builder’s sales person (who is not
your client’s agent) or the title closing person (who is not your
client’s agent) many of today’s REALTORS® have slipped into negligence by
default. I vaguely recall something about fiduciary responsibility in
the Code of Ethics of the National Association of REALTORS® related to looking out for your client’s
best interests.
This discussion of
disclosures is at the heart of today’s foreclosure problem. I carefully
used the word foreclosure, not predatory lending. Many of the loans
which are leading to foreclosures in this area not sub prime and would
not be identified as predatory. Foreclosures in new construction, with
FHA And VA loans, made by prime lenders are seeing foreclosures in
record numbers in the past 3 years. At the same time that Indiana is
making the news with unprecedented new housing starts, unprecedented
numbers of consumers who are building are losing those homes within 3-5
years of taking possession. New fangled loan programs, many with no
down payment from the buyer and woefully inadequate reserves for
taxes, coupled with variable rates and higher income/debt ratios are
pushing a lot of people over the edge. Many consumers say they would
not have gotten the loan had they understood the __________________
disclosure ( fill in the blank—prepayment penalty, variable rate rider,
escrow account, balloon payment, choose one for yourself).
The foreclosure
rate is
Indiana is
at epidemic proportions. While legislation is being debated back and
forth and education efforts are gaining support, the real estate
industry might do well to raise discussions about how to clear the mud
which covers disclosures. It’s yet another opportunity for
REALTORS® to
take the lead in taking corrective action to help stem the growth of
this problem which threatens to undermine the financial stability of our
communities.
We might start the
new year with the really radical idea of a major overhaul of the entire
closing process so that 2 hours were allowed for the closing so that
consumers could have the documents explained at a pace and in a way
which was meaningful. Dramatic change and with a cost, but is the cost
less than what we are currently paying in the way of foreclosures?
Would the use of attorneys by both parties at all closings be a better
option as several states currently do? The foreclosure situation is
serious enough to demand new and creative solutions. LET THE TALKS BEGIN
!!!
Mildred Wilkins is
President of Home Ownership Matters. HOM offers professional training
and Education for real estate professionals and consumers on financial
literacy and predatory lending.
Contact Mildred at
(317) 251-3362.
