The Consumer Financial Protection Bureau (CFPB) has issued the final versions of its new ‘Know Before You Owe’ mortgage forms that lenders will be required to use starting on Aug. 1, 2015.
The new forms are designed to help consumers better understand their options, choose the mortgage deal that's best for them and avoid costly surprises at the closing table.
‘For a long time, many have come to agree that the stack of closing documents is way too large,’ Richard Cordray, director of the CFPB, said during a field hearing held in Boston on Wednesday, at which the finalized forms were unveiled. ‘Some of these forms were intended to help consumers better understand the costs and risks of their mortgages. Others were devised by lenders as defensive measures to minimize the prospects of future litigation. Still, others represent federal, state, and local government requirements, some of which may have become outmoded.
‘The undeniable result is information overload: too much to absorb during the closing process,’ he added. ‘This burdens lenders without helping consumers. Indeed, it is counterproductive insofar as it causes consumers to zone out and sign documents without properly evaluating the information that is critical to understanding the largest financial transaction of their lives. And many leave with a new anxiety, as they find themselves wondering what was buried in the mound of paper that may create some nasty surprise in the years ahead.’
The CFPB claims the new forms resolve the problem of redundant and overlapping information presented in the two standard disclosures that lenders are required to send to borrowers three days after receiving an application. The Dodd-Frank Wall Street Reform and Consumer Protection Act recognized the need to simplify and streamline this information and transferred responsibility for the forms to the CFPB.
The CFPB's new Know Before You Owe rules also limit how much a final mortgage deal can deviate from the original loan estimate, as well as requiring that forms be available in both English and Spanish.
The new Loan Estimate form replaces the early Truth in Lending statement and the Good Faith Estimate, and provides a summary of the key loan terms and estimated loan and closing costs. Consumers can use this new form to compare the costs and features of different loans.
Meanwhile, the new Closing Disclosure form replaces the final Truth in Lending statement and the HUD-1 settlement statement, and provides a detailed accounting of the transaction. Under the new rules, both forms must be provided to consumers within three business days after they submit a loan application.
The CFPB claims it conducted more than two years of extensive research, testing and review to ensure the new loan forms do what the Dodd-Frank Act intended. During the development period, the CFPB solicited feedback from consumer and industry groups through its website, as well as through other types of outreach.
The bureau says its research shows that consumers are better able to understand the new forms compared to the current ones. Testing showed that participants who used the new forms were better able to answer questions about a sample loan – a statistically significant improvement of 29%. Importantly, they were better able to decide whether they can afford the loan, including the cost of the loan over time.
The testing showed that the new forms help consumers better understand key information, such as the level of risk they are taking, the short- and long-term costs, and how to calculate monthly payments. In addition, the new forms help consumers more accurately compare competing loan offers, including how to compare closing costs.
‘Last January, we put in place new protections to improve the functioning of the mortgage market by preventing creditors from extending loans to consumers who do not have the ability to repay them. Today, we are putting in place new measures that ensure consumers have the information they need, when they need it,’ Cordray said. ‘By implementing rules that allow people to better understand the terms of the mortgage deal they are being offered, the Consumer Bureau will help them shop around for a mortgage that makes sense for them.’
Cordray stressed that the CFPB's work in developing the new forms will not be complete until they are fully implemented.
‘At the Consumer Bureau, we believe our responsibility does not end with finalizing this new rule. We must make sure lenders put these changes in place effectively,’ he said. ‘So, as we look ahead, we will work with the industry to help them implement the provisions of the rule, and we will work with consumers to make sure they understand and benefit from these new improvements.’
In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), says the ‘MBA shares the CFPB's goal of creating mortgage regulations that protect consumers and strengthen the real estate finance system.
‘We are pleased that they recognized the enormity of change being implemented in the mortgage systems on Jan. 10,’ he says. ‘The August 2015 deadline is a clear recognition by the CFPB of how significant the change is and the time needed to implement this new rule. We have yet to fully review all aspects of this rule and will provide a deeper analysis once we review the specific details. MBA continues to support clear disclosure forms for consumers that allows them time to review their loan and comparison shop.’
National Association of Realtors President Steve Brown adds: ‘Realtors applaud new rules from the Consumer Financial Protection Bureau that will help home buyers receive timely, accurate, and easy-to-understand information about their mortgage loan before closing.
‘Real estate is the largest financial investment most people will make in their lifetime and it's crucial that consumers understand all of the costs and responsibilities of homeownership before signing on the dotted line,’ Brown adds. ‘The new rules will align and simplify the disclosure requirements from the Truth in Lending Act and the Real Estate Settlement Procedures Act which will streamline the closing process.
‘NAR will continue to review the new rules and their implementation and work with CFPB and our consumer and industry partners to ensure that consumers are not disadvantaged by any of the changes,’ he concludes.
To download a fact sheet about the "Know Before You Owe" mortgage disclosures, click here.
To download a fact sheet about the testing process the CFPB used to arrive at the design of the new forms, click here.
To access the final "Know Before You Owe" mortgage disclosure rule, click here.
To access Richard Cordray's full speech given during the field hearing held in Boston, click here.