Bureau updates mortgage disclosures

The Consumer Financial Protection Bureau (CFPB) is updating the forms that lenders use to give out new mortgages.

On Wednesday, it issued a regulation requiring that mortgage lenders use the new “know before you owe” forms, which have been under development for more than two years and are designed to make sure borrowers understand their options and know what to expect when they take out home loans.

“Taking out a mortgage is one of the biggest financial decisions a consumer will ever make. 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 statement.

The new forms are a consequence of the Dodd-Frank Wall Street reform act and should prevent people from getting into mortgages they don’t understand, Cordray said.

“Consumers need to assess not just the interest rates and the closing costs, but the mortgage insurance costs, the application fees, and how the interest rate might change over the life of the loan,” he said at a field hearing in Boston, according to prepared remarks.

For more than three decades, mortgage lenders have been required to deliver two different disclosures to consumers applying for loans, and then two more when the mortgages close.

Those forms are full of overlapping and confusing information, financial reform advocates have said. The financial reform law called for the agency to simplify and streamline the disclosure process to make it easier for borrowers to know what they were getting involved in.

According to the CFPB, people who used the new forms during testing were 29 percent better able to answer questions about potential loans.

But not all supporters of financial reform were happy with the new forms.

The National Consumer Law Center said that the CFPB’s forms should highlight the loan’s annual percentage rate (APR) more than they do.

Knowing that “simple cost comparison … could protect consumers from abusive loans and avoid confusion in pricing comparisons," it said.

The APR disclosure is currently on the third page of the mortgage lending forms but should be on page one, the group said.

The National Association of Federal Credit Unions had fought to make sure the CFPB did not include an “all-inclusive definition” of APR, and were “pleased” that it did not.

However, the credit union group said that the requirements about disclosures “will complicate” mortgage lending.

The rule requiring the new forms goes into effect on Aug. 1, 2015.