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New Mortgage Origination Rule Shines Spotlight on Need for More Accurate Tax Estimates

Analysis of consumer complaints and mortgage servicing issues related to inaccurate tax estimates at closing.

Dominique Lalisse    |    Housing Policy

The new TILA-RESPA (Truth in Lending Act/Real Estate Settlement Procedures Act) rule, referred to as TRID (TILA-RESPA Integrated Disclosure), focuses on increased quality and accuracy of information for settlement services. While these issues are important, transparency, speed and accuracy of escrow estimations remain key areas of opportunity to improve homeowners’ experience as demonstrated by homeowner feedback and servicing issues.

Escrow amount-related issues are one of the major sources of homeowner dissatisfaction with the origination, closing and servicing processes, according to data from the Consumer Financial Protection Bureau (CFPB). Analysis of customer complaint data shows that a number of borrowers are dissatisfied with the inaccuracies associated with annual tax estimates as well as with settlement funds required at closing.

In the most recent survey, 2015 Annual Consumer Mortgage Experience, published by the CFPB in January 2015, almost 50 percent of all borrowers say they are only “somewhat familiar” with the amounts required at closing. And that percentage is even higher for first-time homebuyers. This reinforces the need for homebuyers to have clear disclosure of closing costs in the loan estimate.

It’s easy to see how these inaccuracies on annual tax estimations are driven by the lack of standardization in the origination and underwriting processes. From the moment a home is put on the market until the time the new homeowner’s mortgage is being serviced by the lender, up to six annual tax estimates are being completed with different levels of accuracy:

  1. The real estate agent will list property tax information in the home listing
  2. A potential buyer will research the property tax information to estimate overall annual costs for a property
  3. The mortgage loan origination officer will research property tax information to complete the loan estimate
  4. The underwriter of a loan will validate property tax information to assess the ability of the homeowner to repay the loan and estimate the amount required at closing
  5. The closing agent will procure property tax information to prepare the closing documents
  6. The servicer of the loan will procure tax amounts and due dates to set up escrow lines

In all methods before closing, past amounts are generally used to determine the amount to be paid by the borrower. Inaccurate estimates could mean the borrower might actually be unable to afford the home or might require an escrow analysis in the first year of the mortgage. If the amount is significantly underestimated, the homeowner might face financial hardship which could have been avoided with a more accurate estimate early in the process.

A survey of a major national lender indicated that about 12 percent of loans will require a change – immediately after closing—in yearly escrow payments of $250 or more due to inaccurate tax estimates. Each change in a homeowners’ escrow analysis not only increases servicing costs but also generates customer dissatisfaction.

The CFPB’s website for borrower complaints has logged approximately 170,000 complaints and while most do not contain enough detail to point to a specific root cause, the chart shows the general breakdown of complaints received:

According to the data, approximately 32 percent of the complaints relate to loan servicing, payments and escrow accounts, and approximately 4 percent relate to the settlement process and costs. Both of these issues are directly affected by the quality of property tax information and estimates throughout the closing process.

The data reinforces the fact that improved accuracy, process standardization and transparency in the mortgage origination and underwriting processes will increase consumer confidence and satisfaction. By using more accurate annual tax estimates during the origination and underwriting processes, lenders will not only satisfy regulatory requirements, but also provide more transparent information and thus a quality experience for the borrower throughout the entire loan lifecycle.

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