WASHINGTON, D.C. — The Consumer Financial Protection Bureau released a much-anticipated final rule that merged mortgage disclosure forms in an effort to help consumers more clearly understand the total costs of a loan.
The agency is calling the two new mortgage forms "Know Before You Owe," an apt description since a hodgepodge of federal mortgage disclosures that the new forms will replace have long been considered duplicative and confusing.
The rule restricts lenders from imposing new or higher fees on a final loan unless there is a legitimate reason, the CFPB says. The final rule takes effect on Aug. 1, 2015, giving mortgage lenders time to implement the changes.
"Our new 'Know Before You Owe' mortgage forms improve consumer understanding, aid comparison shopping, and help prevent closing table surprises for consumers," CFPB Director Richard Cordray said in a press release. "Today's rule is an important step toward the consumer having greater control over the mortgage loan process."
While lenders have generally been supportive of the concept of better disclosures, they have expressed concerns about the CFPB's first attempt at the idea, saying the forms were not simple enough and could give potential borrowers "information overload."
"Although the CFPB's rule combines the disclosures, we believe that the underlying regulations will complicate the process of the mortgage loan transaction," said NAFCU CEO Dan Berger in a statement. "In particular, we are concerned with the rule's inflexibility in regard to changes that can be made to estimates given in the Loan Estimate and to provide borrowers the Closing Disclosure three business days prior to consummation. NAFCU will push back where necessary to ensure that the benefits of combining the current TILA and RESPA disclosures are not diluted by the costs and burdens associated with the underlying regulations."
They also have been critical of other aspects of the disclosures including allowing too little deviation between the initial estimated charges and the final charges given in the disclosures, which has resulted in some charges being inflated.
Michael S. Malloy, mortgage policy and counterparty relations executive at Bank of America, wrote in a comment letter last year that a new requirement to add more fees to rate calculations would make many loans appear as if they were higher-cost loans.
"The 'all-in' finance charge would result in higher 'points and fees' figures, which are calculated using the finance charge as a starting point," Malloy wrote. "Consequently, this would reduce the number of loans that would otherwise be 'qualified mortgages' under Dodd-Frank's ability-to-repay requirements, given that qualified mortgages, as proposed, will not have points and fees in excess of three percent of the 'total loan amount.'"
Lenders also wanted more flexibility in the granting of exceptions from the requirement that the Closing Disclosure be given to the consumer three business days before closing on a loan.
But the response to the new reg wasn't entirely negative. "NAFCU has long supported combining the mortgage disclosures required under the Truth in Lending Act and Real Estate Settlement Procedures Act so that there's less consumer confusion and also decreased regulatory burden on credit unions," said Berger. "While we will study the rule to determine its full impact on credit unions, we are pleased that the final regulations reflect NAFCU-sought recommendations to not include an all-inclusive definition of APR and 'finance charge.' We are further pleased that the final rule, unlike the proposal, does not require credit unions to provide total cost of funds of the disclosures; it does not add Saturdays to the definition of 'business day'; and it does not require credit unions to keep a machine-readable version of the disclosures."
For the past three decades, federal law has required that mortgage lenders give a consumer two different disclosures within three business days after receiving a mortgage application, and again at the closing table when they sign a mortgage contract.
But the Dodd-Frank Act required regulators to meld the forms required by the Truth in Lending Act and Real Estate Settlement Procedures Act. The Federal Reserve Board initially began work on that project before the CFPB assumed responsibility for mortgage disclosures and launched a two-year initiative to combine the forms.
The CFPB says the merged forms will help consumers better understand risky loan features such as prepayment penalties and bigger-than usual periodic payments. The two forms provide a clear breakdown of a loan's terms including principal and interest payments, closing costs and for adjustable rate mortgages, the projected minimum and maximum payments over the life of the loan. The agency also argued that borrowers will have an easier time in making comparisons between lenders when they shop for a mortgage.
When the rule takes effect in 2015, consumers will be given a Loan Estimate form within three business days after they submit a loan application. The three-page Loan Estimate will replace the early Truth in Lending statement and the current Good Faith Estimate. The form provides a summary of loan terms, closing costs and the ability to compare costs and features of different loans.
The Closing Disclosure form is given to consumers three days before closing on a loan — not at the closing table. The five-page Closing Disclosure form replaces the final Truth in lending statement and what is known as the HUD-1 settlement statement, which is used to itemize fees charged to the borrower by a lender or broker.
The final rule also places restrictions on when lenders can charge borrowers more for settlement services than the amount stated on their loan estimate.
