Sixteen years after Congress ordered other regulators to do it, the Consumer Financial Protection Bureau is poised to streamline disclosures of mortgage costs and require lenders to include all fees in the financing rate.
Its proposal promises an end to years of legal skirmishes over whether to categorize services as closing or financing costs and reflects a broader CFPB effort to improve how loan terms are presented to borrowers.
Lenders love the idea of minimizing the threat of lawsuits tied to the Truth in Lending Act but argue the CFPB proposal's reliance on an overhaul of the annual percentage rate — a cost metric even the proposal says homebuyers don't use — is a mistake.
"We're in favor of simplification, because we think that will help decrease compliance violations," says Richard Andreano, a partner in Ballard Spahr's mortgage practice. "At the same time that the CFPB is pushing for an all-in consumer APR, they're acknowledging that it's not very useful."
Many lenders would like the CFPB to work through concerns about the APR before tackling all-in financing, he says.
How loan costs should be disclosed has been a thorny issue for decades. Both the Real Estate Settlement and Procedures Act and Truth in Lending require overlapping documents that break down expenses and their source.
"Not surprisingly, consumers often find the forms confusing," the CFPB states in a preamble to its proposal.
To address the problem, title insurance and virtually every other closing cost would be aggregated in the APR to reflect the overall cost of borrowing. The bureau on Friday extended the deadline for public comments until November.
Multiple disclosures and separation of closing costs from financing costs led to a proliferation of unbundled charges and attempts to game the APR, consumer advocates have alleged.
Along with making loans less comprehensible, "it's allowed and encouraged padding of third-party fees," says Diane Thompson, an attorney for the National Consumer Law Center. Advocates hope that lumping things like title insurance into the borrower's financing costs will induce lenders to press vendors to lower their fees, she says.
"You just need a few [borrowers] who shop on it to create downward pricing pressure," she says.
Industry officials tend to doubt that shuffling the presentation of charges would heighten competition to lower closing costs.
"I hear the theory, but I don't think it's a good one," Andreano says. Previous simplifications of pricing disclosure, such as mortgage loan officer compensation, didn't do much to alter noninterest costs, he says.
However, lenders see a potential benefit to simplification because many have ended up in hot water over where they've listed fees. Bill Dallas, the chief executive of Skyline Financial, recalls being sued by plaintiffs lawyers over how his former company disclosed a $12 expedited mailing fee — even though the faster shipping ended up saving customers more on interest.
The CFPB's cost disclosure rules have the potential to save all parties grief. A very similar push in 2009 by the Federal Reserve — before the Dodd-Frank Act transferred consumer disclosure responsibilities to the CFPB last year — was generally met with approval, or at least equanimity, by the lending industry.
There are caveats to that support, however.
Because APRs would increase, more loans are likely to hit state and federal triggers that subject high-cost loans to additional rules.
"We want APR to be a more accurate reflection of the overall cost of credit," the Mortgage Bankers Association wrote in a note Friday to members. "However, higher APRs and finance charges could affect the number of loans subject to other legal requirements."
The CFPB notes this issue in its proposal, which contemplates adjusting those triggers to mitigate the effects.
Andreano would prefer to see the issue sorted out ahead of time.
"When you raise those questions [of the bureau], people say, 'Good question, we'll have to analyze that,' " he says.
The broader concern is that many lenders think the APR is too flawed a tool to fix. The CFPB's proposed rule notes consumers generally don't understand the difference between interest rate and APR, and even it suggests that it might be better to minimize its prominence.
"The bureau's consumer testing suggests that moving the disclosure of the APR away from the disclosure of the loan's contract interest rate and placing the APR with other long-term metrics may reduce consumer confusion," the proposal states.
Lenders long ago reached that conclusion, Dallas says.
"I've been in the business for 35 years, and I've never had a customer ask me what the APR is," he says. "They ask the same thing: What's my payment, what's my rate and what do I need to bring to the closing."