Mortgage disclosures can be downright confusing. The multiple documents, the technical jargon, the long list of fees and charges. Are they trying to confuse us? Future home buyers will be happy to know that change is in the air. A soon-to-be redesigned disclosure form could make all of that mortgage information easier to digest.
Over the last couple of years, the government has been implementing some new disclosure forms for mortgage lenders. Another redesigned form will make its debut sometime in 2012. It combines two different mortgage disclosures into a single, reader-friendly document.
What are Mortgage Disclosures?
Under the current guidelines, borrowers receive two documents when applying for a mortgage loan:
The first document is called the Truth in Lending (TIL) disclosure. This purpose of this disclosure is to help borrowers understand the full cost of borrowing. It contains information about the interest rate, the APR, the amount financed, and the total amount to be paid over the life of the loan. According to federal law, mortgage lenders must provide this disclosure within three days of receiving a loan application.
The second mortgage disclosure is called the Good Faith Estimate (GFE). It includes the loan amount, the initial interest rate, escrow account information, and a list of closing costs / settlement charges the borrower must pay on closing day. The three-day rule applies to this disclosure as well. The GFE got its own makeover in 2010. Now it’s back on the drawing board.
Consumer advocates have long argued that borrowers receive too many documents from lenders, and that the information is hard for the layperson to interpret. They have pressed Congress for mortgage disclosures that are more streamlined and easier to read. What good is a disclosure, they say, if it drowns the borrower with industry jargon and redundancies?
What is Changing?
The Consumer Financial Protection Bureau (CFPB) is attempting to simplify these mortgage disclosures. They are merging the two documents mentioned above — the Truth in Lending disclosure and the Good Faith Estimate — into a single document. At the time of publication, the new form had not been finalized. There were two versions of the redesigned mortgage disclosure form (see links below). The CFPB has welcomed input from consumers and mortgage professionals alike. They are allowing people to vote for one of two designs for the new disclosure.
The combined disclosure form will look like one of these two options:
These changes are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This federal statute was signed into law in July 2010. It’s the same piece of legislation that created the Consumer Financial Protection Bureau, which is the agency now tasked with the redesign of mortgage disclosures. Their first task is to combine the two disclosure forms into a single document. The second (and more troubling) task is to make the combined document easier to understand.
According to the CFPB, the two forms contain overlapping information that confuses borrowers. The paperwork redundancy also leads to unnecessary costs and regulatory oversight. So they are combining the documents and making the information more clear to the layperson.
It’s no small task, though. Consumers and mortgage professionals alike have been giving feedback through the CFPB blog. For the most part, consumers seem to like the new design options. Industry insiders have not been as kind.
Plenty of Critics in the Mortgage Industry
Mortgage brokers and originators have been sounding off with constructive (and sometimes not-so-constructive) criticism of the mortgage disclosures. Some claim that the new form doesn’t tell borrowers the total amount of cash needed to close — a critical piece of information.
Others point out that certain “prepaid” items, such as escrow deposits and home insurance premiums, have been lumped in with the lender’s closing costs. This could confuse borrowers even more, say the critics.
There is more work to be done. But it’s certainly a step in the right direction. I asked the CFPB when the new disclosure forms would be implemented, but they have not yet responded. They likely won’t take effect until 2012.