One of the most daunting aspects of applying for a mortgage – understanding the complicated, overlapping and inconsistent mortgage disclosure documents – will soon become easier to endure.
The Consumer Financial Protection Bureau (CFPB) has just opened for public comment a proposal for two new mortgage disclosure forms designed to make understanding mortgage costs an “Aha!” moment rather than an “OMG!” ordeal.
The mortgage disclosure proposal is also a unique experiment in public participation, something that’s becoming a CFPB trademark approach to new regulations. The new forms were designed with extensive input from consumers, lenders, mortgage brokers, settlement agents and others – people who will actually use the forms.
Mortgage and real estate expert Peter Miller, publisher of the Ourbroker.com web site says the agency’s work is needed, but so is enforcement of existing regulations.
“While it’s appropriate to simplify and improve the lending process with better paperwork, such efforts distract the public from far bigger issues. Where are the convictions for robo-signing, the origination of toxic loans or the rigging of interest rates?”
Required by the Dodd-Frank Act to combine the Truth in Lending Act’s (TILA) loan cost disclosures with the Real Estate Settlement Procedures Act’s (RESPA) HUD-1 Settlement Statement disclosure, CFPB proposed two documents that reduce both paperwork and consumer confusion – “The Loan Estimate” and “The Closing Disclosure.”
The Loan Estimate
This document would replace the RESPA-required HUD-designed Good Faith Estimate and the “early” TILA Truth in Lending disclosure designed by the Federal Reserve Board (FRB).
It discloses all a home loan’s key features, costs and risks associated with a mortgage a consumer is considering. It can also be used as a loan comparison shopping tool, because all lenders will use the same format.
Consistent with current law, the lender or broker must give the form to the consumer within three business days after the consumer applies for a mortgage loan.
With the exception a fee to obtain a credit report, the lender cannot charge consumers any fees until after the consumers have been given the Loan Estimate form and the consumers have communicated their intent to proceed with the transaction.
Any written estimates prior to a borrower’s application must come with a disclaimer that such estimates are not to be confused with the mandated Loan Estimate.
The Closing Disclosure
This document would replace the RESPA-mandated HUD-1 form as well as the “revised” Truth in Lending disclosure mandated by TILA and designed by the FRB.
It discloses all of the costs of the transaction from the cost of the property, the down payment and the financed amount to title and escrow fees, closing costs and tax and insurance payments – the works.
The lender must give consumers the Closing Disclosure form at least three business days before the consumer closes on the loan. A new form delivered to the consumer is necessary if there are any changes during escrow and the consumer gets an additional three days to review it. Some common changes are exempt from this rule.
Under current law, title and escrow agents are required to provide the HUD-1, while lenders are required to provide the revised Truth in Lending disclosure.
The new rule could change that and make the lender responsible for the disclosure or allow the lender to rely upon the settlement agent to provide the form, but remain responsible for the accuracy of the form.
Both the Loan Estimate and Closing Disclosure forms contain additional new disclosures not currently included on existing forms. The proposal details line-by-line what each form must contain.
The proposed rule applies to most mortgages, but not home-equity loans, reverse mortgages or mortgages secured by property not attached to the land or to mortgages made by lenders who make five or fewer home loans a year.
The proposal is open for public comment until Nov. 6, 2012
For details on the proposal see CFPB’s “Know Before Your Owe” page.