The Consumer Financial Protection Bureau (CFPB) has announced the "Know Before You Owe" project, an effort to combine two federally required mortgage disclosures, the Truth-in-Lending Act (TILA) disclosure and the Real Estate Settlement Procedures Act (RESPA) Good Faith Estimate (GFE), into a single, simpler form that makes the costs and risks of the loan clear and allows consumers to comparison shop for the best offer.
Tomorrow, May 19th, the CFPB will begin testing two alternate prototype forms that are designed to be given to consumers who have just applied for a mortgage loan. This testing—which will take place over the next several months and involve one-on-one interviews with consumers, lenders, and brokers—will precede and inform the CFPB’s formal rulemaking process. The CFPB also has posted the prototypes on its Web site with an interactive tool to gather public input about the designs.
"I think the forms are a good start to simplifying the shopping process," said Mike Anderson, CRMS, Government Affairs Committee chair of the National Association of Mortgage Brokers (NAMB). "I applaud the CFPB for asking for feedback from industry and keeping us involved in the process."
The current TILA mortgage disclosure form is two pages long and the current GFE is three pages long, and while they are intended to convey basic facts about home loans to help consumers comparison shop, these forms have overlapping information and complicated terms that can be difficult to understand to a consumer.
"One of MBA's primary goals will be to make certain that not only do the new forms provide consumers with the information they need in a simple, clean way, but also that they can be implemented into lenders' operations and systems with a minimum of disruption," David H. Stevens, president and chief executive officer of the Mortgage Bankers Association (MBA). "Just 18 months ago the industry expended considerable costs on RESPA changes. We need to make sure that this new form is highly beneficial to consumers who will bear the implementation costs."
The CFPB expects to conduct five rounds of evaluation and revision through September 2011 to select a single draft disclosure and then refine it. Initial rounds of testing will include both English- and Spanish-language versions. Interviews will be conducted in six cities: Albuquerque, N.M.; Baltimore; Birmingham, Ala.; Chicago; Los Angeles; and Springfield, Mass. In addition to this qualitative testing, the Bureau is soliciting online feedback from consumers and reaching out to consumer and industry groups to gather input, particularly regarding implementation and usability.
“Buying a home is one of the biggest financial decisions most Americans will ever make," said Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau (CFPB). "The Know Before You Owe project is about giving consumers upfront, easy-to-understand information that helps them compare different mortgage offers and find the one that’s best for them. The current forms can be complicated and difficult for consumers to use. They are also redundant and can be costly for lenders to fill out. With a clear, simple form, consumers will be in a better position to answer two basic questions: Can I afford this mortgage and can I get a better deal somewhere else?”
The testing and public feedback process will enable the CFPB to revise the design and refine the content based on how it works for consumers. The CFPB has taken a fresh approach to the form, considering what the laws mandate, what information consumers really need for comprehension and comparison, and how to make the form stand out from other loan documents.
"I think these sample disclosures do still need some work," said Anderson. "They need to add the sales price/estimated value, signature line for the consumer and showing private mortgage insurance/mortgage insurance."
Over the summer, in addition to testing the draft forms, the CFPB will conduct additional analysis and research. The CFPB will also consider underlying regulatory issues and ways to refine closing-stage forms, a process that will likely extend into the fall and early next year. The Bureau is required by the Dodd-Frank Act to issue proposed forms and implementing regulations by July 2012 for formal notice and comment. The CFPB also expects to conduct quantitative tests prior to finalizing the form.
"I really like that it is simple and easy to read and understand. Ironically, the form looks a lot like the old GFE, but with TIL references," said Jonathan Pinard, president of First National Compliance Solutions Inc. and chairman of the Empire State Mortgage Bankers Association (ESMBA). "There are likely some improvements that could be made. Specifically different expiration dates for rates versus closing costs and more columns to address state-specific charges. I am hopeful that these improvements will be addressed during the comment period."
Click here to view Prototype 1 and Prototype 2.