The Consumer Financial Protection Bureau has released draft proposals for a simplified mortgage disclosure form that will replace the separate forms borrowers are currently provided to satisfy the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
The CFPB is requesting feedback from consumers and the lending industry on the proposed forms, saying it’s the first step in a process that will last months.
The bureau wants to know if the two-page draft loan disclosures it’s proposing would help consumers understand the true costs and risks of a mortgage, and whether lenders and mortgage brokers could easily explain the form to their customers.
Lenders and other real estate industry players have long complained that having two sets of loan disclosures is confusing to consumers. Consumer advocates have said that loan disclosure forms in use during the housing boom did not make consumers aware of the pitfalls of "exotic" loans offered by some lenders.
The legislation that created the CFPB — The Dodd-Frank Wall Street Reform and Consumer Protection Act — attempts to address both issues by transferring oversight of both TILA and RESPA to the CFPB in July, and mandating that the bureau issue a proposal for a unified federal mortgage disclosure form within 18 months.
Like the TILA disclosure form in use today, both draft disclosure forms put forward for comment by the bureau would provide borrowers with information on key loan terms like interest rate, monthly loan payment, and estimated monthly taxes and insurance.
Each form would flag features that could trigger increased or additional payments, such as an adjustable interest rate, balloon payment, or prepayment penalty.
Both forms would also show how much borrowers would have to bring to the closing table — a feature lacking from the current RESPA Good Faith Estimate (GFE). The forms show the annual percentage rate (APR) over 30 years, and how payments would vary at three different stages in the life of the loan.
The amount of loan principal that would be paid off in the first five years of the loan is also broken out from total payments made, most of which are applied to interest.
The second page of each disclosure form breaks down estimated closing costs like loan origination fee, title insurance, insurance, and appraisals, in a fashion similar to the RESPA GFE.
Both disclosure forms proposed by CFPB include tolerances limiting how much charges for settlement services that borrowers can’t shop for — like appraisals and credit reports — can change at closing.
Unlike the three-page RESPA GFE, there is no "trade-off table" to help borrowers consider the relationship between settlement charges and interest rate when shopping for a package that includes both a loan and settlement services. Lenders may cover some or all of a borrower’s closing costs when they pay a higher interest rate, which can be useful for borrowers who are short of cash at the closing table.
Reaction to the draft disclosure forms was mixed in comments on a blog post at the CFPB’s website, Consumerfinance.gov.
"Substantially better than the current form, which was a dismal failure," said one commenter, who used the name "Craig."
The commenter also stated, "Borrowers want to know the rate, payment and the amount they need to bring to closing. Going beyond that confuses everything. Purchase transactions should state the purchase price — otherwise, simplicity is a primary goal."
Another commenter expressed worry that lenders would be able to "tip the estimates their way" by "lowballing" estimates for settlement services like title insurance, nonrequired services like home warranties, and advance charges like escrow for insurance and prepaid property taxes.
Boulder, Colo.-based mortgage lender Eric Peltier stated that he wondered why "prepaids" such as escrows and homeowners insurance should be lumped in with costs.
"These are not lending costs! Clients are still confused by this," Peltier commented. "If the forms broke out the transactional costs from the prepaids, borrowers would have a better, clearer understanding of the moving parts of their mortgage. When I tell them my closing costs are $2,600 and then the GFE says $5,000, it’s confusing. I will not vote for either of these options because they are fundamentally wrong."