Consumer watchdog agency proposes new mortgage disclosures

July 9, 2012

The federal consumer watchdog agency on Monday proposed banning several controversial mortgage fees and unveiled new disclosure forms intended to help borrowers better understand the terms of their home loans.

The moves come as the Consumer Financial Protection Bureau approaches its first anniversary. During a speech in Las Vegas on Monday, CFPB Director Richard Cordray highlighted abuses in the mortgage market and said restoring trust in the industry was one of the key drivers for creating the agency.

“We want a mortgage market that is fair — one where people can get a fair shake and businesses compete fairly with one another,” he said.

Under the new proposals, all borrowers would receive new disclosures when they apply for a mortgage. The revamped disclosures are part of the CFPB’s “Know Before You Owe” initiative, and the agency has spent the past year and a half testing the new forms with consumers, lenders and industry groups.

The first page of the form includes not only the basics of the mortgage, such as the interest rate and monthly payments, but also how they may change over time and the maximums they could reach. The forms must also flag risks such as negative amortization, which happens when a lender charges consumers less in a month than they owe in interest, increasing the overall balance.

“When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal,” Cordray said in a statement.

The CFPB said it received more than 27,000 comments from consumers and lenders on the format of the documents after publishing drafts online. It even created heat maps of the forms that showed areas that caught the public’s attention.

David Stevens, president and chief executive of the Mortgage Bankers Association, a trade group, said that the group supports increased transparency but that the new forms represent a significant shift for an industry comprising many small and independent players. The proposed regulations span nearly 2,000 pages and would dramatically change the way the industry collects and reports information — and the costs could end up being passed on to consumers, he said.

Stevens said he helped implement the last major overhaul of disclosures while he was assistant secretary at the Department of Housing and Urban Development. The process took five years.

“This isn’t about saying don’t do it,” Stevens said. “It’s a question of the massive amount of change being made in a very tenuous housing finance system . . . and making sure we do this deliberately and we don’t rush it.”

In addition to the new forms, the CFPB is also targeting high-cost mortgages. It released a proposal to expand the the definition of a high-cost mortgage to include those with interest rates that are 6.5 percentage points above the average prime rate or that carry fees exceeding 5 percent of the loan’s value.

The rule would require borrowers applying for these types of loans to receive housing counseling first. It also addresses several fees associated with those loans that consumer advocates have attacked as abusive or excessive.

For example, the CFPB proposed prohibiting lenders in most cases from charging a lump sum due at the end of the loan’s life, known as a balloon payment, and would bar penalties for paying off a loan early. It also would limit late fees to 4 percent of the amount due that month and restrict charges for providing payoff statements.

According to government data, about 40,000 high-cost mortgages were made between 2004 and 2011.

The public has 60 days to comment on the proposals related to high-cost mortgages. Federal law requires that a final rule be completed in January. Comments on the rest of the disclosure forms are open for 120 days, though no timeline has been set for a final regulation.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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