The Consumer Financial Protection Bureau’s revamped mortgage form paperwork scheduled to take effect in August 2015 is intended to make the application process for mortgage loans less rigorous for borrowers. Its actions directed by a mandate from Congress, the CFPB states that the new mortgage forms are meant to ensure that the costs and terms of loans are distinctly expressed in the lenders’ documentation.
The impetus for the new rules was the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2011, Elizabeth Warren — now a Massachusetts’ Democratic Senator — headed the CFPB and began the initiative, entitled “Know Before You Owe,” to create the mortgage forms.
Currently, lenders are required by federal law to present two different, but overlapping mortgage forms to loan applicants. This rule must be carried out within three business days following receipt of an application, generally. Additionally, two more forms are required to be delivered once the transaction has reached the closing stage. There is repetitive and somewhat perplexing language throughout these forms. The average buyer is neither schooled in real estate finance nor able to handily facilitate what could be considered a platform steeped in legalese. In too many cases, consumer confusion has been the result. Oftentimes, people have underestimated interest rates; occasionally, monthly payments increased during a loan’s lifetime.
With the new regulations, the Bureau is replacing the existing mortgage form with two new ones; Loan Estimate and Closing Disclosure. The former will be due three business days after the application has been submitted; the latter, three business days before closing.
In essence, the two mortgage form replacements combine several related disclosures and reconcile differences prevalent in the current paperwork. Language is clearer and portrays a more reader-friendly format — employing larger, bold font where appropriate — making it easier for users to readily locate essential information. Items are expanded, eliminating the current cramped style. Also, the Bureau has paid heed to industry complaints relating to uncertainty on the proper way to fill out mortgage forms. Detailed how-to instructions are incorporated in the new forms, line by line. The CFPB believes this step should aid in reducing the burden on lenders and other preparers.
Richard Cordray, CFPB Director, said that the new rule “will be an important step toward the consumer having greater control over the mortgage loan process. Taking out a mortgage is one of the biggest financial decisions a consumer will ever make.” Cordray further stated, “The forms improve consumer understanding, aid comparison shopping and help prevent closing table surprises for consumers.”
The Loan Estimate
The Loan Estimate mortgage form will actually be replacing two forms in use for that function now. One is the HUD-designed Good Faith Estimate under the Real Estate Settlement Procedures Act. The other is the one developed by the Board of Governors of the Federal Reserve System as mandated by the Truth in Lending Act.
Improvements in the proposed Loan Estimate form include disclosures to aid prospective borrowers in easily grasping the essential features, costs and risks of the mortgage for which they hope to qualify.
Another provision is of particular interest to lenders. Prior to formal application, lenders and brokers may provide mortgage seekers with written estimates. The new rule now requires that such manufactured paperwork contain a disclaimer to prevent confusion with the legitimate Loan Estimate form.
The Closing Disclosure
Perhaps the most beneficial change for consumers concerning this mortgage form is that they must be presented with it at least three business days before closing on the loan. As it stands now, people often get this disclosure shortly before or right at the closing. With the improved form, borrowers are afforded a comfortable time frame to earnestly compare final terms and figures with those of the estimate.
Similar to the current law, the proposed regulations maintain the limitations on instances in which consumers may be asked to pay more fees for the various settlement services. Unless there is an applicable exception, these charges could not increase: 1) the lender’s fees for its own services; 2) charges for affiliate-provided services; 3) charges for services for which the lender doesn’t allow the consumer to shop. Also, charges for other services couldn’t increase by more than ten per cent, unless an exception applied.
The new mortgage form will be available in English and Spanish.