The Consumer Financial Protection Bureau first put out a “Know Before You Owe” draft mortgage statement several months ago. It attempted to convey, in one page, all the information a prospective mortgage purchaser would need to make an informed decision about the fee schedule, terms of the mortgage and closing costs, and to be able to compare different mortgage products.
It turns out they failed. Now their second stab at a mortgage disclosure form clocks in at an unwieldy three pages. How could they?
More seriously, the disclosure documents come with proposed bans on certain closing fees:
The first page of the form includes not only the basics of the mortgage, such as the interest rate and monthly payments, but also how they may change over time and the maximums they could reach. The forms must also flag risks such as negative amortization, which happens when a lender charges consumers less in a month than they owe in interest, increasing the overall balance [...]
In addition to the new forms, the CFPB is also targeting high-cost mortgages. It released a proposal to expand the the definition of a high-cost mortgage to include those with interest rates that are 6.5 percentage points above the average prime rate or that carry fees exceeding 5 percent of the loan’s value.
The rule would require borrowers applying for these types of loans to receive housing counseling first. It also addresses several fees associated with those loans that consumer advocates have attacked as abusive or excessive.
For example, the CFPB proposed prohibiting lenders in most cases from charging a lump sum due at the end of the loan’s life, known as a balloon payment, and would bar penalties for paying off a loan early. It also would limit late fees to 4 percent of the amount due that month and restrict charges for providing payoff statements.
Here are the proposed disclosure forms. Being three pages, they are more comprehensive than the original iterations of the form. But the idea is the same. These are plain English disclosures that tell the borrower the terms of the loan, whether things like the interest rate or monthly payment can increase over time, the closing costs, whether a balloon payment or prepayment penalties can accrue. The new forms came about from a deliberative, interactive process that included 14,000 citizen comments, which CFPB assembled into a heatmap.
More interesting to me are the proposed bans on certain fees. CFPB will expand the definition of a “high-cost mortgage” to afford more protections for borrowers with these products. That puts them under the auspices of the Home Ownership and Equity Protection Act. For these loans, balloon payments and prepayment penalties would be banned. Late fees would be capped at 4%. Counseling would be provided (presumably to urge the borrower not to take a high-cost mortgage product). Modified or deferred loans would not come with a penalty.
What we have here is the first effort to actually monitor and oversee the mortgage market, which as we’ve seen has made its profits on borrower ignorance and a desire to abuse that knowledge asymmetry. This is a solid first step to ending that asymmetry.
The proposed rule can be found here. The rule is scheduled to go into effect at the end of the year.