The Consumer Financial Protection Bureau (CFPB) is rolling out two new mortgage disclosure forms for review and comment. The forms, one a loan estimate and the other a closing disclosure, are intended, in the words of CFPB, to help consumers make informed decisions when shopping for a mortgage and avoid costly surprises at the closing table. The forms are part of a new rule that CFPB is also proposing today that expands protections for high-cost mortgage loans.
The forms, part of the CFPB's Know Before You Owe project, will be given to consumers after they apply for a loan but before closing that loan. They are different but overlapping and are intended to replace those required by the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) which were long thought to be confusing to consumers. The Bureau said more than a year of research, testing, writing, and review went into their development.
The Loan Estimate and the Closing Disclosure present the costs and risks of the loan using plain language and in a simplified format. CFPB said they will also benefit lenders by cutting down on redundancy. The forms will allow consumers to compare different mortgages more effectively and examine their estimated and final terms and costs more easily.
In the case of both forms the interest rates, monthly payments, loan amount and closing costs are clearly spelled out on the first page. Elsewhere the forms explain how payments might change over the life of the loan and offer more information about taxes, insurance, and other costs. The forms also provide clear warnings about features some consumers might want to avoid such prepayment penalties or an increase in the loan balance should negative amortization be present, and provisions to make estimates more reliable. The Loan Estimate, which is three pages long, must be given to consumers within three business days of their submission of a loan application and the Closing Disclosures at least three days before the scheduled closing. The Closing Disclosure is now five pages in length. A proposed rule would restrict circumstances in which consumers can be required to pay more for settlement services than the amount stated on their Loan Estimate.
"When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal," said CFPB Director Richard Cordray. "Our proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home."
The new rule proposed by CFPB today would provide special protections from fees and risky loan terms for consumers who take out mortgages that are considered "high cost" by virtue of the interest rates, points and fees, or prepayment penalties. The rule, contained in a document of 1099 pages, would implement Congress's expansion of the Home Ownership and Equity Protection Act (HOEPA). The proposal would generally ban potentially risky features such as balloon payments and would completely ban prepayment penalties on high-cost loans. The rule would also ban fees for modifying loans, restrict fees when customers ask for a payoff statement, and cap late fees.
In addition the proposed rule would require counseling for consumers before they could take out a high-cost mortgage and would implement TILA counseling requirements where first-time borrowers are considering a loan that permits negative amortization.
The proposal will be available for public comment for 60 days (until September 7) with some provisions subject to comment until November 6. A final rule will be published next January.
