People purchasing homes and refinancing mortgages will have the details of their loans spelled out in simple terms as the government moves to streamline cumbersome disclosure forms.
On Wednesday, the Consumer Financial Protection Bureau issued a final rule requiring lenders to use its new mortgage forms, which are designed to make it easier for borrowers to locate crucial information such as interest rate, monthly payments and costs to close the loan.
Housing advocates have long complained that the pile of paperwork home buyers receive from lenders is confusing and rife with duplication. Some home buyers have said that in the run-up to the housing crisis, they were steered into mortgages with terms they didn’t fully grasp, such as loans that offered low interest rates that would triple after a few years.
“Taking out a mortgage is one of the biggest financial decisions a consumer will ever make,” CFPB Director Richard Cordray said. “Our new Know Before You Owe mortgage forms improve consumer understanding, aid comparison shopping and help prevent closing table surprises for consumers.”
The disclosure rule, which takes effect Aug. 1, 2015, aims to curb bait-and-switch tactics, when the terms of the mortgage change at closing, the bureau said.
Loan officers must provide consumers a summary of estimated loan costs and terms within 72 hours of receiving their mortgage applications. The summary will feature a more detailed breakdown of terms, such any prepayment penalties and balloon payments, than the good-faith estimate lenders now provide, according to the bureau.
Consumers will also get more time to consider their options, as lenders will have to provide final disclosures three days before closing, instead of the day borrowers sign the contract. The idea is to give people the opportunity to ask questions and negotiate over changes.
The bureau will restrict lenders from hitting consumers with new or higher fees on a final loan unless there is a legitimate reason.
Mortgage disclosures have been governed by the Truth in Lending Act and Real Estate Settlement Procedures Act for the past 30 years. The federal laws sought to protect consumers from being taking advantage of by lenders but produced documents that were too complex for many Americans to comprehend.
The 2010 Dodd-Frank financial reform law required regulators to rewrite the forms to make the information more accessible to borrowers. The CFPB conducted more than two years of research, testing and review to create its new disclosure forms.
Industry groups welcomed the changes and the length of time the bureau is giving lenders to comply. “We are pleased that they recognized the enormity of change being implemented in the mortgage systems,” said David H. Stevens, president and chief executive of the Mortgage Bankers Association, a trade group.
Overhauling the forms is part of a broader undertaking at the consumer bureau to revamp the mortgage market. Earlier this year, the CFPB rolled out new rules to change standards for originating and servicing home loans. Those rules are set to take effect at the beginning of next year, although some lenders are still scrambling to get ready for the changes.