WASHINGTON – Nov. 20, 2013 – The Consumer Financial Protection Bureau (CFPB) issued a rule today that requires lenders to start using easier-to-understand mortgage disclosure forms. The new “Know Before You Owe” mortgage forms will replace existing federal disclosures, and help consumers understand their options.
“Taking out a mortgage is one of the biggest financial decisions a consumer will ever make,” says CFPB Director Richard Cordray. “Our new ‘Know Before You Owe’ mortgage forms improve consumer understanding, aid comparison shopping, and help prevent closing table surprises for consumers.”
Today’s rule is effective Aug. 1, 2015. CFPB says it’s already working with industry and consumers for an effective implementation.
For more than 30 years, federal law has generally required mortgage lenders to deliver two different, overlapping disclosures to consumers within three business days after receiving a mortgage application. At the closing stage, federal law again generally requires two forms. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act included a mandate to streamline the consumer information, and it transferred form oversight to the CFPB.
CFPB published an example of the new forms on its website. They’ll also be available in Spanish. The new forms include:
The Loan Estimate. Consumers must receive this form within three business days after submitting a loan application. It replaces the early Truth in Lending statement and the Good Faith Estimate. Consumers can use the new form to compare the costs and features of different loans.
The Closing Disclosure. Consumers receive this form three business days before closing on a loan. It replaces the final Truth in Lending statement and the HUD-1 settlement statement, and provides a detailed accounting of the transaction.
CFPB says it did extensive testing on the new forms, and “consumers of all different experience levels, with different loan types – whether focused on buying a home or refinancing – were able to understand CFPB’s new forms better than the current forms.”
It says the new forms make the following concerns easier to understand:
• Risk factors: Lenders must tell homebuyers about prepayment penalties, any larger-than usual periodic payments and complicated loan structures.
• Short-term and long-term costs: Both the Loan Estimate and Closing Disclosure more easily explain the total costs of the loan. It includes a breakdown of the loan amount, the principal and interest payment and how it could change, and closing costs.
• Monthly payments: The CFPB forms state in bold font what a consumer’s monthly principal and interest payments will be. If it’s an adjustable-rate loan, the forms include the projected minimum and maximum payments over the life of the loan.
In addition to examples of the new forms, an
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