CFPB Releases Final Rule on Mortgage Disclosure Forms

The Consumer Financial Protection Bureau released a much-anticipated final rule on Wednesday that merged mortgage disclosure forms in an effort to help consumers more clearly understand the total costs of a loan.

The agency is calling the two new mortgage forms "Know Before You Owe," an apt description since a hodgepodge of federal mortgage disclosures that the new forms will replace have long been considered duplicative and confusing.

The rule restricts lenders from imposing new or higher fees on a final loan unless there is a legitimate reason, the CFPB says. The final rule takes effect on Aug. 1, 2015, giving mortgage lenders time to implement the changes.

"Our new 'Know Before You Owe' mortgage forms improve consumer understanding, aid comparison shopping, and help prevent closing table surprises for consumers," CFPB Director Richard Cordray said in a press release. "Today's rule is an important step toward the consumer having greater control over the mortgage loan process."

While lenders have generally been supportive of the concept of better disclosures, they have expressed concerns about the CFPB's first attempt at the idea, saying the forms were not simple enough and could give potential borrowers "information overload."

They also have been critical of other aspects of the disclosures including allowing too little deviation between the initial estimated charges and the final charges given in the disclosures, which has resulted in some charges being inflated.

Michael S. Malloy, mortgage policy and counterparty relations executive at Bank of America, wrote in a comment letter last year that a new requirement to add more fees to rate calculations would make many loans appear as if they were higher-cost loans.

"The 'all-in' finance charge would result in higher 'points and fees' figures, which are calculated using the finance charge as a starting point," Malloy wrote. "Consequently, this would reduce the number of loans that would otherwise be 'qualified mortgages' under Dodd-Frank's ability-to-repay requirements, given that qualified mortgages, as proposed, will not have points and fees in excess of three percent of the 'total loan amount.'"

Lenders also wanted more flexibility in the granting of exceptions from the requirement that the Closing Disclosure be given to the consumer three business days before closing on a loan.

"Regarding subsequent redisclosures, we believe the rule needs to provide more flexibility to ensure that an additional three business day waiting period is imposed only when it will truly benefit the customer," Michael J. Heid, president of Wells Fargo Home Mortgage, wrote in a letter last year.

For the past three decades, federal law has required that mortgage lenders give a consumer two different disclosures within three business days after receiving a mortgage application, and again at the closing table when they sign a mortgage contract.

But the Dodd-Frank Act required regulators to meld the forms required by the Truth in Lending Act and Real Estate Settlement Procedures Act. The Federal Reserve Board initially began work on that project before the CFPB assumed responsibility for mortgage disclosures and launched a two-year initiative to combine the forms.

The CFPB says the merged forms will help consumers better understand risky loan features such as prepayment penalties and bigger-than usual periodic payments. The two forms provide a clear breakdown of a loan's terms including principal and interest payments, closing costs and for adjustable rate mortgages, the projected minimum and maximum payments over the life of the loan. The agency also argued that borrowers will have an easier time in making comparisons between lenders when they shop for a mortgage.

When the rule takes effect in 2015, consumers will be given a Loan Estimate form within three business days after they submit a loan application. The three-page Loan Estimate will replace the early Truth in Lending statement and the current Good Faith Estimate. The form provides a summary of loan terms, closing costs and the ability to compare costs and features of different loans.

The Closing Disclosure form is given to consumers three days before closing on a loan — not at the closing table. The five-page Closing Disclosure form replaces the final Truth in lending statement and what is known as the HUD-1 settlement statement, which is used to itemize fees charged to the borrower by a lender or broker.

The final rule also places restrictions on when lenders can charge borrowers more for settlement services than the amount stated on their loan estimate.