This week the Consumer Financial Protection Bureau (CFPB) issued new proposed guidelines for mortgage disclosure forms. The goal is to make mortgage disclosures’ more borrower friendly by making them shorter, simpler and written in everyday English. The CFPB has dubbed the proposal “Know Before You Own.” Instead of reams of documents the new disclosure form takes only three pages to inform you of all the costs and risks related to the loan. The CPFB’s end game is to make it simpler for you to shop for a mortgage as well as to avoid expensive unanticipated costs at closing.
CFPB director Richard Cordray said in a statement:
“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.”
After one and one-half years of research and consumer testing by the Consumer Financial Protection Board the new forms have been proposed. The first is called the “Loan Estimator” and the second is the “Closing Disclosure.” When and if these new forms are approved they would replace the far more complex disclosures papers that are now required by Federal law.
The first page of the Loan Estimator clearly states the total costs involved with the mortgage and home ownership. The proposed form includes the interest rates, monthly payments, the amount of the loan and total closing costs. Additionally, the form informs borrowers how the interest rates, the amount of the loan and payments can change during the duration of the loan. This information will include the maximum these factors can climb to. Finally, the form includes information about other costs of home ownership such as insurance, property taxes and other related costs.
Another feature of the proposed forms is in addition to making an estimate more reliable is to alert customers of potential dangers. Borrowers would learn about the meaning of prepayment penalties as well as negative amortization – a situation that allows the loan balance to increase over time.
Under the proposal lenders have to give customers the Loan Estimate within three business days of their loan application. The Loan Disclosure would have to be given to borrowers at least three business days prior to the loan closing so that borrowers can be sure they are getting the terms they expected. If not, they will have time to cancel the deal.
According to the director of the CFPB Richard Cordray these are needed changes since existing mortgage disclosure documents are inadequate when it comes to presenting the key terms of mortgages that are most important to borrowers.
“ No more costs and risks buried in the fine print that do not become clear until it is too late. No more mortgages designed to fail – mortgages that benefit originators but not borrowers. No more last-minute shocks at the closing table that leave consumers stuck with fees they did not know about or plan for. And no more costly surprises and runarounds by mortgage servicers that leave people with nowhere to turn when they need help the most.”
The proposal by the CFPB also limits any increases in closing costs by stipulating when and why borrowers may be charged more for closing services than the costs outlines in their Loan Estimator.
To make the forms simpler, the CFPB proposal runs over 1,000 pages. Comments are being accepted by the CFPB until November 6, 2012. With a proposal this long, the long time for comment is needed so that consumer advocates and industry representatives can digest it.
If approved, no date for implementation has been set.