Tuesday, May 24, 2011

Agency Asking for Consumer Feedback on Mortgage Disclosure Overhaul

A newly formed consumer watchdog has begun a process designed to make it easier for Americans to comparison shop for mortgages. Last week, the Consumer Financial Protection Bureau, formed by the Dodd-Frank Act financial reform law, initiated a project it's calling “Know Before You Owe.” The project involves redesigning the mandatory disclosure forms that lenders send out to potential borrowers when they apply for a loan, and the agency is asking for feedback from consumers as part of the process.

The bureau unveiled two prototypes of a new form that will eventually replace the currently used Good Faith Estimate and Truth in Lending disclosure forms with an easier-to-understand format. The bureau will undergo several rounds of testing and revision on the forms, before one is selected and proposed, possibly as early as September. The agency has asked the public for suggestions on how to make it easier for everyday consumers to understand the costs associated with a mortgage. The ultimate goal of the project is to make it easier for Americans to compare the terms of multiple loans in what for many is the biggest financial commitment of their lives.

Obviously, mortgages differ on the interest rates associated, which vary by lender, but there are several other factors that affect the cost of a mortgage that are not as easy to compare. Some loans carry adjustable rates and there are underwriting fees and closing costs that vary from lender to lender. Insiders say that many of the problems that fueled the mortgage crisis could have been prevented were the disclosure process simpler.

Under the current system, lenders are required to provide loan applicants the Good Faith Estimate and Truth in Lending forms within three days of receiving their application for a home loan. The 3-page Good Faith Estimate, which essentially breaks down closing costs associated with a mortgage, underwent an overhaul last year, as part of a regulation that also required closing costs to remain within 10 percent of provided estimates.

Previous attempts at simplifying the two forms have failed, and they still contain over-lapping information and are quite confusing to consumers, especially first-time buyers. One key piece of information that is still curiously absent from both forms is the amount of money borrowers will have to come up with at closing, a pretty significant figure in the eyes of homebuyers.

The new proposed forms each contain an itemized list of costs on the first page, including closing costs, monthly payments, and projections of monthly payments for future years. Both also contain a second page that provides a detailed explanation of loan terms, making it easier for potential buyers to compare loan offers from multiple lenders.

CFPB will evaluate and revise the forms several times before September, when it is expected to choose one of the two to propose for future mortgage disclosure use. The agency may also look at simplifying other forms used later in the process, and all the new forms should be in use by July 2012. To offer suggestions or feedback on the proposed forms, consumers are asked to go to: consumerfinance.gov

Marin Real Estate

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