After a year and a half of research and review, the Consumer Financial Protection Bureau released simplified mortgage disclosure forms Monday that it hopes will make it easier for borrowers to understand the terms and costs of their loans and therefore be a step toward "restoring trust in the mortgage market" after the housing bubble.
As part of the bureau’s "Know Before You Owe" mortgage project, the bureau received tens of thousands of comments and conducted 10 rounds of testing with consumers and industry participants over the course of 18 months to come up with the proposed forms.
The public has until Nov. 6, 2012 to comment on most of the proposal. The bureau will review the comments before issuing the final rule, the CFPB said.
Consumers currently get two disclosure forms whenever they apply for a mortgage, and two more at the closing table.
Loan applicants get one loan disclosure form aimed at satisfying Truth in Lending Act requirements (the "TILA" form), detailing loan terms like annual percentage rate (APR).
Another form — the good faith estimate, or GFE — is required by the Real Estate Settlement Procedures Act (RESPA), and is intended to help borrowers evaluate their complete loan package, including closing costs like title insurance.
At closing, consumers get another TILA disclosure detailing the terms of their mortgage, and a HUD-1 Settlement Statement itemizing additional closing costs.
Lenders and groups representing consumers and the real estate industry have complained that having two sets of loan disclosures is confusing to borrowers.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act tasked the bureau with creating a single, unified form for loan applicants — a Loan Estimate — and a single, unified form for homebuyers closing a deal — a Closing Disclosure — that satisfy both TILA and RESPA requirements.
"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 in a statement.
"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."
According to the bureau, the new forms are simpler than the old forms, and allow consumers to compare the estimated and final terms and costs of different loan offers more easily. The forms also highlight key costs associated with a loan, including interest rates, monthly payments, the loan amount, and closing costs and how these might change over the life of the loan.
"Overall, I think the form is a vast improvement over the existing Good Faith Estimate and the existing Truth in Lending disclosure," said Jillayne Schlicke, CEO of real estate continuing education company CE Forward Inc. and founder of the National Association of Mortgage Fiduciaries.
"The old Truth in Lending form is absolutely awful. The two things borrowers care most about are nowhere on the old form, that is, the loan amount and … their interest rate. Instead, the government gives us the bizarre things like ‘amount financed,’ which is not the loan amount, and APR, which is not the loan rate."
The Dodd-Frank Act holds loan originators to a higher standard, she added.
"For example, before the real estate meltdown, loan originators could give borrowers the disclosure forms and that was it. It’s different now. Loan originators need to make sure that the borrowers understand what’s on the form," she said.
The proposed forms will "help loan originators discharge their duties," she said, because they will also be able to more easily understand the terms outlined within.
"With the old Truth in Lending form, many loan originators — not all — could not properly explain what was on that form," she said.
Schlicke teaches prelicensing courses on mortgage lending law to prospective loan originators. She said her students love the proposed forms "hands down," though, at first glance, they "kind of freaked out" about a couple of items on the forms, she said.
One was the "total interest percentage," which spells out the total amount of interest that the borrower will pay over the loan term as a percentage of the loan amount. The sample figure in the form is just above 69 percent.
It helps the borrower see "if you made Payment One all the way to Payment 360, that’s a huge sum of money. I don’t think the average random consumer is visually aware of that when they sign their loan docs," Schlicke said.
"I really like that feature," because it helps the consumer make a more informed decision, which is "really what disclosure forms are all about," she added.
The other item that gave her students pause was the lender’s "approximate cost of funds."
"It helps the borrower see that banks make money by charging interest," Schlicke said.
"The bank may have received the money at 1 percent but is lending to us at 4 percent, so that’s the bank’s profit margin right there."
The proposed forms also warn consumers about some risks, such as prepayment penalties and negative amortization, which is an increase in the loan balance should the borrower make payments that don’t cover the interest owed.
Under a proposed rule that explains how the forms should be filled out and used, lenders would be required to give consumers a Loan Estimate within three business days of their loan application and a Closing Disclosure at least three business days before closing on a loan. The rule would also limit the circumstances under which consumers would be required to pay more for closing costs than was stated on their Loan Estimate.
"This will allow consumers to decide whether to go ahead with the loan and whether they are getting what they expected," the bureau said.
In a letter to the bureau about a year ago, the Mortgage Bankers Association said the loan disclosures proposed by CFPB at the time were inconsistent with tolerance requirements currently in place under RESPA, which limit how much some loan fees can differ from initial estimates.
The MBA declined to comment specifically on the new proposed rule Monday, noting the rule comes in at more than 1,000 pages.
"We welcome the CFPB’s efforts to simplify mortgage disclosures so that borrowers have the most complete picture of the terms and costs of the mortgage they are applying for or signing for. It is critical we give borrowers all the information they need in an easy to digest way," said David Stevens, the association’s president and CEO, in a written statement.
"Changing the disclosures will also impose massive change on the industry, who will need to implement the new forms, rules and processes into their mortgage processing, so we will be working with the CFPB to make sure the forms, and the rules surrounding them, are best for borrowers and lenders alike."
American Land Title Association CEO Michelle Korsmo called the rule "a step in the right direction," but said the groups was disappointed that the bureau has proposed keeping tolerances in place.
"Regrettably, the bureau continues to use a tolerance concept that has resulted in consumers receiving inflated estimates and prevents title and settlement agents from competing fairly with one another," Korsmo said in a statement.
Currently, settlement agents are required to provide the HUD-1 and lenders are required to provide the TILA form. In the proposed rule, the CFPB asks for comment on who should be responsible for providing the new, unified Closing Disclosure, proposing that either the lender be responsible for delivering the form or that the lender rely on the settlement agent to provide the form, but with the lender remaining accountable for the accuracy of the form.
"ALTA believes lenders should continue to have responsibility and liability for preparing the part of the disclosure related to the loan costs, while settlement agents should continue to have responsibility and liability for preparing the part of the disclosure related to the settlement costs," Korsmo said.
"We should remember title insurance and settlement companies didn’t cause the housing crisis and didn’t take advantage of consumers and investors. Consumers deserve an independent, third-party at the settlement table and this rule should ensure this role remains in the real estate transaction."
National Association of Realtors president Moe Veissi said that while "NAR has long supported combining the Good Faith Estimate and Truth in Lending disclosure into a single more consumer-friendly form" the CFPB has ended up rewriting "the entire settlement process."
"We believe these changes have the potential to cause significant confusion, disruption, and impose tremendous added costs to consumers and settlement service providers. We hope the CFFB will reconsider many of the changes they propose and instead focus on changes that will truly benefit consumers and will help foster the burgeoning housing recovery," Veissi said.
Like ALTA, NAR objected to the lack of clarity surrounding who would be required to fill out and deliver the Closing Disclosure.
"In addition, while the three day waiting period to close has a few good exceptions, one being buyer- and seller-negotiated changes, a myriad of other issues could arise that would not have an exception, and instead trigger a new waiting period," the trade group said.
"Also, it appears that a few states might actually have to change their state laws to comply. Finally, imposing ‘machine readable’ standards on forms could be costly to implement, especially for small business."
Diane Cipa, general manager of title insurance firm The Closing Specialists, said she had not had a chance to read through the new proposed rule, but considered the last version of the new disclosures she had seen "workable."
"As an old timer in this business I know we have to adapt and go with the flow. The RESPA 2010 changes to the HUD and GFE have proven to be wonderful tools for keeping the lending process honest. Will the new disclosures be an improvement? I doubt it," Cipa said.
"I expect loads of confusion as an industry which is weary of the whirlwind of changes to laws and regulations tries to conform. We’ll try, though, and I expect in the end we’ll succeed. We have to. I am simply hopeful that the consumer will be better served in the end. I know that’s the goal of CFPB and that’s our goal, too."
Also Monday, the CFPB proposed a rule that would expand consumer protections mortgage loans considered "high cost" based on their interest rates, points and fees, or prepayment penalties. The rule would ban balloon payments generally and would completely ban prepayment penalties. It would also ban fees for modifying high-cost loans and limit late fees as well as fees charged when consumers ask for a statement that tells them how much they need to pay off their loan.
The rule would require some loan applicants receive housing counseling, including those applying for high-cost mortgages and first-time buyers whose loans permit negative amortization. The rule would also require all applicants be provided with a list of housing counseling agencies.
The public will have 60 days, until Sept. 7, 2012, to comment on most of the proposed rule. The bureau will issue the final rule in January 2013.
