The new consumer finance regulator has proposed simplified mortgage disclosure forms, aiming to ensure that borrowers receive clear and easy-to-understand information about home loans when they apply for credit.
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The Consumer Financial Protection Bureau released two alternative mortgage disclosure forms, each taking only the front and back of a sheet of paper. The forms would combine and replace the current two-page Truth in Lending Act disclosure and the three-page good faith estimate required under the Real Estate Settlement Procedures Act, or RESPA. The bureau, created by last year's Dodd-Frank financial reform law, will test the prototypes and incorporate feedback through September. It's calling the effort the "Know Before You Owe" project.
"A home loan is the biggest financial commitment most Americans will make in a lifetime," says Elizabeth Warren, who runs the bureau. "With a clear, simple form, consumers can better answer two basic questions: Can I afford this mortgage? And, can I get a better deal somewhere else? That's good for American families and the markets they depend on."
The prototypes emphasize the monthly loan payment, interest rate, potential cautions and other loan features, with boxes and arrows highlighting the most pertinent data.
Under Dodd-Frank, the bureau must propose new rules for simplified mortgage forms before July 2012. Staff started drafting the prototypes "quickly out of the gate" in consultation with federal regulators who have been working on streamlining the forms for years, Warren says.
The agency expects five rounds of evaluation and revision, with consumer testing in five cities and input from the industry, before the forms are finalized this fall. Then, the bureau will publish proposed regulations and a draft model form in order to solicit more comment and run quantitative tests before the rules are final.
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Financial industry executives praise the move. "We think it's a great step," says Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. "If everybody fully understands the product you're entering into, both the consumer and the lender win."
The Mortgage Bankers Association's more guarded response notes that the industry spent significant money 18 months ago on RESPA changes -- costs that are borne by consumers.
"Making mortgages easier to understand for prospective borrowers has been a long-term priority for the mortgage industry and we are pleased to see the initial prototypes take a step in that direction. One of the challenges this effort inevitably faces is trying to strike the right balance between simplification and providing as much information as possible to help borrowers make the most informed choices," MBA President David H. Stevens said in a statement.
Alex J. Pollock, a resident fellow at American Enterprise Institute who proposed a one-page form in 2007, notes that the average mortgage closing form is 80 to 85 pages, which could be boiled down. He says the proposed forms don't include the ratio of debt to income, a key factor in whether individuals can afford a loan.
"The real object of this is not to give someone a piece of paper that they passively consume but to get them to actively think about the borrowing commitment they are about to enter into," Pollock says. "Anything that moves in that direction I am for."
Even as Warren prepares the new consumer bureau to assume regulatory power July 21, Wall Street lobbyists and their Republican allies in Congress seek to curb the bureau's power. Pending House legislation would replace the director position with a five-member bipartisan commission and make it easer for other regulators to overturn CFPB rules. President Barack Obama is expected to appoint Warren as director during an upcoming congressional recess, given that 44 Republican senators have pledged to block any director nomination.
"This is all part of a unified campaign to weaken and delegitimize the agency," says David Arkush, director of Public Citizen's Congress Watch division, which supports the bureau and Warren as director. "If you had some basic consumer protections in the financial services arena, there's a really good chance the housing bubble wouldn't have gotten as large as it got and you wouldn't have had so many predatory lending and mortgage abuses."
Mark Calabria, director of financial regulation studies at public policy research organization the Cato Institute, says overly burdensome regulation could lead to a contraction in credit and less stability in the financial system. "Two pages is still too long. Borrowers shop on only a few items," Calabria says about the proposed forms.