Here's a novel idea: know what you're getting into before you sign your life away.Â
That's the concept behind the Consumer Financial Protection Bureau's (CFPB) proposal for new mortgage disclosure forms designed to help consumers make informed decisions when shopping for a mortgage and avoid costly surprises at the closing table. The CFPB is also proposing a rule that expands protections for "high-cost" mortgage loans.Â
"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, who will be speaking in Las Vegas today about the agency's work to restore trust in the mortgage market. "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."Â
Easier-to-use mortgage disclosure formsÂ
The proposed forms, which consumers will receive after applying for a loan and before closing, are part of the CFPB's "Know Before You Owe" mortgage project. They are the result of more than a year of research, testing, writing, and review.Â
Consumers currently receive two different but overlapping federal disclosure forms after application that are supposed to spell out the terms and costs of the mortgage loan -- the forms required by the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The differences in these two forms can be confusing to consumers and industry. At the direction of Congress, the CFPB is combining them to create one document.Â
The CFPB has designed the new "Loan Estimate" Â and "Closing Disclosure" forms to present the costs and risks of the loan in clearer terms. The forms benefit consumers by using plain language and a format that will help them understand their loans. They benefit lenders by cutting down on redundancy. Below are some of the key improvements in the CFPB's proposed forms:Â
Simpler than the old forms. Consumers can understand and compare different mortgages more effectively, and examine their estimated and final terms and costs more easily, helping them make the right decisions for themselves and their families.
Highlight information consumers need. Interest rates, monthly payments, the loan amount, and closing costs are all right there on the first page of the CFPB proposed form. Also, the first page explains how the interest rates, payments, and loan amount might change over the life of the loan, including the highest they can go. In addition, the forms offer more information about taxes, insurance, and other property costs so consumers can better understand the total cost.
Easier to look out for risks. The forms provide clear warnings about features some consumers may want to avoid, such as prepayment penalties and an increase in the loan balance (negative amortization). The proposed rule also contains provisions to make estimates more reliable. And because the proposed rule requires lenders to keep electronic copies of the forms they give to consumers, industry and regulators will be able to address compliance questions more easily.
More time to consider choices. Lenders must give the Loan Estimate to consumers within three business days of applying for a loan and consumers must receive the Closing Disclosure at least three business days before closing on a loan. This will allow consumers to decide whether to go ahead with the loan and whether they are getting what they expected.
Limits on closing cost increases. The 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.Â
The CFPB's proposal took into consideration 10 rounds of testing with consumers and industry and feedback from the public on multiple prototype forms over the past 18 months. Public feedback has included tens of thousands of comments.Â
A side-by-side comparison of the proposed mortgage forms and the old ones, an illustration of how the rule relates to the forms, and a timeline of the CFPB's Know Before You Owe mortgage project are available here.Â Â
The public can weigh in on the CFPB's proposal here. The public will have 120 days -- until Nov. 6, 2012 -- to review and provide comments on most of this proposal. However, comments are due for specific portions after 60 days on Sept. 7, 2012. The CFPB will review and analyze the comments before issuing final rules.Â
High-cost mortgage protectionsÂ
Consumers who take out mortgages that are considered "high cost" receive special protections from fees and risky loan terms. The CFPB is proposing rules that would expand what is considered a "high-cost mortgage" and provide more protections to consumers who take out those loans.Â
The proposed rule would implement Congress's expansion of the Home Ownership and Equity Protection Act (HOEPA) with respect to mortgages with high interest rates, fees, or prepayment penalties. The CFPB's proposal would:Â
Ban potentially risky features. For mortgages that qualify as high-cost based on their interest rates, 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), and would completely ban prepayment penalties.
Ban and limit certain fees. The CFPB's proposed rule would ban fees for modifying loans, cap late fees, and restrict the charging of fees when consumers ask for a payoff statement (a document that tells borrowers how much they need to pay off the loan).
Require housing counseling for high-cost mortgages. The proposed rule would require consumers to receive housing counseling before taking out a high-cost mortgage. In addition, the CFPB's proposal would implement TILA counseling requirements for first-time borrowers taking out certain mortgage loans that permit negative amortization. The proposal would also implement an amendment to RESPA to generally require that a list of housing counselors or counseling organizations be provided to all mortgage applicants.