By Herb Weisbaum, The ConsumerMan
The Consumer Financial Protection Bureau?wants mortgage disclosure forms to be short, simple and in plain English. The proposed ?Know Before You Owe? forms unveiled this week summarize the costs and risks of that loan in three pages. The goal is to make it easier for you to shop for a mortgage and to prevent costly surprises at closing.
CFPB
The first page of the proposed new Loan Estimate form. Click to see form comparisons.
?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,? CFPB director Richard Cordray said in a statement.?
The two new forms ? the ?Loan Estimate? and the ?Closing Disclosure? ? are the result of 18 months of research and consumer testing by the CFPB. If approved, they would replace the more complex disclosure documents that are currently required.?
The first page of the proposed form would include the interest rates, monthly payments, loan amount and closing costs. It would also explain how the interest rates, payments and loan amount might change during the life of the loan ? including how high they could possibly go. The form would also provide information about taxes, insurance and other property costs. The goal is for borrowers to understand the total cost of the transaction.?
The forms are also designed to make estimates more reliable and to provide clear warnings about potential pitfalls. Customers would be told about the risks involved with prepayment penalties and negative amortization (where the loan balance increases over time).?
Lenders would be required to give the Loan Estimate to customers within three business days of applying for a loan. The five-page Closing Disclosure would be provided at least three business days before the loan closes. This will help borrowers know if they?re getting what they expected and if they should go ahead with deal.?
CFPB director Cordray says change is needed because current mortgage disclosures do a poor job of presenting the key terms that matter most to borrowers.?
?The paperwork is full of jargon.?The forms overlap.?Costs and risks are sometimes disclosed in small type, and sometimes they are not disclosed at all,? he says in remarks prepared for a speech in Las Vegas this week. ?As a result, consumers have had trouble even understanding the deal they are making, let alone being able to compare loan offers.??
The CFPB?s proposed rule would also limit increases in the closing costs by restricting when customers could be required to pay more for settlement services than the amount stated on their Loan Estimator.?
Reaction to the changes?
While the new forms are simple, the?CFPB proposal is not. In fact it runs more than 1,000?pages. So it will take some time for both lenders and consumer advocates to go through it and make detailed comments.?
Industry groups say they support the idea of simplified disclosures, but that doesn?t mean they?ll support all of the CFPB?s proposed changes.?
?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," said Dave Stevens, president and CEO of?the Mortgage Bankers Association. "It is critical we give borrowers all the information they need in an easy to digest way.?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.?
Consumer advocates seem generally pleased.?
?We like that these forms tell people in a more prominent way if there?s a prepayment penalty and whether the cost can increase later on,? says Kathleen Day at the Center for Responsible Lending.?
Linda Sherry, director of national priorities at Consumer Action, says the new forms should be easier to understand.?
?As far as the clarity and the information presented, it?s very complete,? Sherry says.?
But Diane Thompson, an attorney at the National Consumer Law Center, is not happy with the proposed forms.? She?s concerned about the level of complexity.?
?The form provides a wealth of analysis of the loan terms,? she says. ?However, the form does not allow for the kind of cost comparison that could protect consumers from abusive loans.??
Thompson doesn?t understand why the annual percentage rate is not listed on the first page of the new form. The APR is a single figure that combines that total cost of the loan. It has traditionally been used as an easy way to compare offers. Instead, the amount of cash the borrower will need to bring to closing is shown on the first page.?
?This focus on the cash to close plays into the hands of lenders who seek to focus consumers on short term rewards (no cash to close!) rather than long term risk and pricing,? Thompson says.?
Richard Cordray, the director of the CFPB, discusses how the new consumer bureau is tackling making mortgage applications easier.
New rules for high-cost mortgages?
The CFPB wants special protections for anyone taking out a mortgage considered to be ?high-cost? because of the interest rate, points and fees or prepayment penalties.?
The proposed rule would generally ban balloon payments (a large, lump-sum payment usually due at the end of the loan.) It would prohibit prepayment penalties for such a loan. It would also ban fees for modifying these loans and cap late fees.?
Under the rule, borrowers would be required to receive counseling before taking out a high-cost mortgage.?
The agency?is accepting comments on most of the proposed mortgage rule changes until Nov.?6. The deadline for comments on the high-cost mortgage protections is Sept.?7.?
More Information:?
CFPB: Restoring Trust in the Mortgage Market?
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