CFPB Proposes New Mortgage Forms and Limits on Lending Costs

WASHINGTON — The Consumer Financial Protection Bureau took two major steps toward reshaping the nation's residential mortgage market Monday, proposing revised mortgage disclosure requirements and stricter limits on high-cost loans.

The disclosure proposal, part of the bureau's "Know Before You Owe" project, is meant to simplify the current mortgage process by combining overlapping disclosure policies currently required under the Truth in Lending Act and Real Estate Settlement Procedures Act. The separate proposal would broaden the definition of a "high-cost loan", subjecting a greater pool of mortgages to restrictions on prepayment penalties and balloon payments.

"I am here today to say about the mortgage market: 'No Mas,'" CFPB Director Richard Cordray said in prepared remarks for a Las Vegas speech Monday to the National Council of La Raza, a Hispanic advocacy group. "No more costs and risks buried in the fine print that do not become clear until it is too late. No more mortgages designed to fail — mortgages that benefit originators but not borrowers.

"No more last-minute shocks at the closing table that leave consumers stuck with fees they did not know about or plan for. And no more costly surprises and runarounds by mortgage servicers that leave people with nowhere to turn when they need help the most."

Combined, the much-anticipated proposals are nearly 1,400 pages long, giving industry officials a mound of details to sift through before public comments are due over the next few months.

(Comments for the proposal on high-cost loans are due Sept. 7. For the disclosure proposal, the CFPB divided the comment period in two phases: Sept. 7 for certain provisions, and Nov. 6 for others.)

The agency also released a proposed three-page loan estimate form that summarizes for borrowers the key terms of their mortgage offer, which is meant to be easily compared to a five-page closing disclosure form. As part of Monday's announcement, the bureau introduced a new website that allows users to compare the proposed new disclosures with existing ones.

But while the proposed forms are meant to simplify what has been a confusing disclosure process for both lenders and borrowers, numerous elements of the two proposals are likely to run into industry opposition.

For example, the disclosure rule would require lenders to provide a disclosure form to borrowers with details about their closing at least three business days before the closing occurs.

That idea has already drawn opposition from the Mortgage Bankers Association, which argues there are better ways to ensure that borrowers get the loan they believed they would receive.

Still, the disclosure proposal represents a key step forward on the goal — long shared by members of the industry, regulators, and lawmakers alike — of improving a process marred by the daunting and baffling stack of disclosures required under current rules for borrowers to review before signing.

The proposal would limit the circumstances under which the amount charged for closing costs can increase between the original loan estimate and the final closing disclosure form.

"At this point, it is not easy to object, to ask questions, or to walk away from the deal," Cordray said. "But this is not what closing on a home should be like. Consumers should know what they are getting into. They should be able to trust that no unseen traps are lurking in their path. They should be clear on the price paid at closing and how much they will be paying in the future."

David Stevens, president of the Mortgage Bankers Association, lauded the intent behind disclosure rule, but he questioned whether a 60-day comment period is long enough. He said that the proposed disclosure rule, which runs nearly 1,100 pages, would have a massive impact on all aspects of the mortgage industry.

"It's almost like coming into a factory and saying, 'We're going to change the entire process by which a certain product is manufactured," Stevens said in an interview.

The second rule would change the rules of the road for high-cost mortgages, a category that includes many subprime loans. High-cost mortgages have been subject to additional consumer protections since 1994, but under the proposed new rules those protections would be expanded.

For example, under the current rules, a mortgage is considered high-cost if the points and fees charged to the consumer exceed 8% of the loan amount. Under the new rules, that threshold would fall to 5% for most loans.

Under the existing rules for high-cost mortgages, most prepayment penalties are banned, but there are exceptions in certain instances. Those loopholes would be closed under the new rules.

In addition, the proposed new rule for high-cost mortgages would generally ban balloon payments; such payments are already banned for loans with terms of less than five years.

The CFPB's proposed rule would also ban and limit certain fees on high-cost mortgages, and it would require consumers to get housing counseling before taking out such a loan.

In a fact sheet that accompanied the release of the two proposed rules, the bureau made clear that it plans to continue rolling out proposed changes to the mortgage market this summer, with the goal of finalizing several proposals in early 2013.

The agency plans to propose rules on mortgage points and fees this summer, and finalize them in January.

The CFPB announced the same timetable with regard to rules that will warn borrowers about interest-rate adjustments and the imposition of force-placed insurance, as well as for rules that will require mortgage servicers to keep up-to-date records.