The Consumer Financial Protection Bureau announced new proposals today that it says will make the mortgage market more transparent and easier for home buyers to navigate. The new proposals will create new mortgage disclosure forms to help guide consumers through shopping for a mortgage and will also expand protection for consumers against so called "high-cost" mortgages.
The new disclosure forms are part of the CFPB's Know Before You Owe initiative to help consumers better understand the terms and costs of their different mortgage options. Under the current system consumers receive two different but overlapping federal disclosure forms after they apply for a mortgage loan. Consumers, the bureau says, often don't understand the difference between the two documents. The bureau, under the direction of Congress, is now combining the two forms in one document. The CFPB simplified the language and format of the document, making the costs and risks of the loan easier for the customer to understand.
"When making what is like 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, who is introducing the proposals in Las Vegas today, said 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.
The interest rates, monthly payments, loan amount and closing costs are all presented on the first page of the redesigned form along with explanations of how the interest rates, payments and loan amounts might change over the life of a loan and how high they can go. The forms also include more information on taxes, insurance and property costs so consumers can better grasp the total cost of the new house they're purchasing.
The forms also include warnings about prepayment penalties and increases in loan balances as well as requiring lenders to keep electronic copies of the forms to more quickly answer compliance questions from consumers and regulators. The proposals will also restrict the circumstances in which lenders can demand that a consumer pays more for settlement services than the amount stated in their loan estimate.
The CFPB will also implement Congress's expansion of the Home Ownership and Equity Protection Act to protect customers from certain mortgage features and fees associated with "high-cost" mortgages. Some of those features and fees banned will include balloon payments (a large lump sum typically due at the end of the loan), prepayment penalties and fees for modifying a loan or asking for a payoff statement (which tells a customer how much they still owe on the mortgage).
This rule will also require housing counseling for consumers before taking out one of these high-cost mortgages. A list of housing counseling services will have to be provided to all mortgage applicants.
The CFPB conducted 10 rounds of consumer testing - and received industry feedback - over 18 months to come up with the new disclosure document. The public can make suggestions concerning the new proposals here and here.