Rulemaking

One part of our proposed rule to improve the disclosures consumers receive when applying for and closing on a mortgage was a change to the current definition of “finance charge.” The finance charge is intended to reflect the cost of credit for consumers as a dollar amount. It’s used to calculate the Annual Percentage Rate or “APR.”

The proposed rule would eliminate numerous exceptions that exclude common costs (such as title insurance) from the finance charge. We want APR to be a more accurate reflection of the overall cost of credit. However, higher APRs and finance charges could affect the number of loans subject to other legal requirements and protections, such as special disclosures and restrictions for high-cost mortgages. In another rulemaking, we also proposed an adjustment that would prevent that from happening, by changing the coverage test for the high-cost mortgage protections to account for the higher APRs.

Comments on the proposed changes to the definition of the finance charge and the proposed change to the high-cost mortgage coverage test were originally due on September 7, 2012. Based on the feedback received, the Bureau now believes that it is appropriate to provide the public with additional time to prepare their comments. These comments are now due November 6, 2012. All other deadlines under both proposed rules remain unchanged.

For more information about the extensions, please see:

• Notice of Comment Extension for proposed changes to the definition of the finance charge
• Notice of Comment Extension on whether and how to account for the implications of a more inclusive finance charge on the scope of HOEPA coverage

Your opinion is important – weigh in now.

As we talked about on Friday, the Bureau is trying to put the customer service back in mortgage servicing. We are proposing nine rules to address issues that consumers face when paying their mortgage loans, dealing with escrow accounts, or figuring out what to do when they have fallen behind on their loans. We want to get rid of surprises and runarounds by servicers, which are often hired by creditors and investors to manage home loans.

You may not know this, but getting comments from the public – you – is an essential part of the agency rulemaking process. Federal law generally requires that the public get an opportunity to read a proposed rule and submit comments before the rule is finalized. Agencies publish the proposed rules in the Federal Register.

All too often, this opportunity passes, and the public doesn’t weigh in. This, in part, is because not everybody skims the Federal Register every day.

We want to make it easier for consumers and small businesses to tell us what they think about the rules that we are working on. To do that, we’ve partnered with Cornell University, which has launched a project called Regulation Room as part of the Cornell e-Rulemaking Initiative, to get your take on our new proposed mortgage servicing rules.

RegulationRoom.org is not a government website. It is operated by students and staff at Cornell, with the goal of making it easy for people to participate in the rulemaking process. They are researching how to remove barriers to public participation, and we are excited to be partnering with them.

• First, the Cornell folks realized that all too often, the public is unaware of the rule-writing process, so they are spreading the word through a social media campaign.
• Next, they realized that most members of the public are not interested in reading a Federal Register notice that may easily be 100 pages or more. They use “layering” of information so you can quickly get an overview, but have the ability to dive deeper if you are interested in a particular point or subtopic.
• Also, they realized rulemakings involve complicated issues that can benefit from dialogue rather than just one-time letter writing. Besides presenting the information, Regulation Room hosts a forum for discussion. Even better, the forum is moderated to help answer questions and get more detailed information and feedback. Feel free to say that you do or don’t like our rule, but be prepared for a moderator to ask you to be more specific: Why do you feel that way? How could it be improved?
• Finally, they realized that most members of the public are unfamiliar with the formal commenting process at Regulations.gov (the official government site). So Regulation Room presents information and conducts a conversation right when a proposed rule first comes out, and then closes its forum down about a week before the end of the comment period so that the Cornell team can assemble all the feedback they have received into an official comment. People who have participated get one last chance to react to the summary before it is submitted formally to the CFPB through regulations.gov. And, like all other formal comments, we will read and consider it.

We are excited about this project for two reasons.

First: We really do want to hear what you think of our proposals on mortgage servicing.

Second: We want to learn as much as possible from this experience about how to get more public feedback in future rulemakings.

So head on over to Regulation Room and let us know what you think!

Dear CFPB,

Recently, I saw your notice of proposed rulemaking to combine and simplify existing mortgage disclosures. It’s 1,099 pages long! Why does it take so many pages to create something that’s supposed to be easy to use and understand?

Sincerely,
Interested in your regulations

Dear Interested,

This is a great question, one you’re not alone in asking — 1,099 is a lot of pages, as those of us who were involved in writing them can attest.

Let’s start with some background. Currently, two federal laws – the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) – mandate that consumers receive disclosures of certain information about mortgage loans. The Dodd-Frank Act required the CFPB to propose a rule to combine the TILA and RESPA disclosures.

If you want to see the new combined disclosures, combine and simplify existing mortgage disclosures check them out here. If you want to see what the proposal means for you, we’ve provided summaries, one on what it would mean for consumers and one with more technical detail.

You said “propose a rule to combine the disclosures” instead of just “propose combined disclosures.” Why?
It’s an important distinction. The rule explains how we would expect industry to use the disclosures: when to issue them, how they apply to different loans, what various terms mean, etc.

And that proposed rule is 1,099 pages?
Actually, no. We are not proposing 1,099 pages of new regulations. That page count is for the notice of the proposed rule, not the rule. Like notices of proposed rulemaking issued by other agencies (particularly the Federal Reserve Board), our proposal consists of three basic parts: (1) the preamble explaining the proposal; (2) the text of the proposed regulations; and (3) guidance on how to comply with those regulations.

In terms of pages, the new regulations are only a small part. Most of the pages explain what we are doing and why we are doing it. As required by law, we analyze the costs and benefits of the proposal for consumers and industry. We also provide thorough guidance on how to comply including samples of completed forms, which the industry requested during our outreach and Small Business Review Panel process. Because of the variability of mortgage loan and real estate transactions, industry wanted specific guidance for many different potential scenarios. This added to the page count.

Here’s how the notice breaks down:

Content	Pages
Preamble Directions on how to submit comments Summary of the proposed rule Overview of the mortgage market and the mortgage shopping process Summary of 43 years of TILA and RESPA mortgage disclosure regulation Summary of the Dodd-Frank Act provisions requiring the Bureau to combine the TILA and RESPA mortgage disclosures and related Dodd-Frank Act mortgage rulemakings Summary of the Bureau’s outreach, disclosure testing, and Small Business Review Panel Statement of the Bureau’s legal authority Detailed explanations of the reasons for each aspect of the proposed rule and requests for comment Analyses of the costs and benefits of the proposed rule for consumers and industry, as required by the Dodd-Frank Act, the Regulatory Flexibility Act (as amended by the Small Business Regulatory Enforcement Fairness Act), and the Paperwork Reduction Act	684
Proposed amendments to regulations New rules Technical and conforming amendments to existing rules	209
Proposed guidance regarding compliance with the amended regulations	205
Signature page	1
TOTAL	1,099

The preamble is long.
It is. The preamble provides context for the proposed forms and regulatory changes. The mortgage market is big, and mortgage disclosure regulation has 43 years of history. Also, before writing the rule, we spent a lot of time talking to industry and consumers and analyzing costs and benefits. That’s a lot of context, and that means a long preamble.

Why bother with all this context?
First, some of it is required by law. Second, we believe that part of our commitment to open government is providing more rather than less information about our work. Finally, we want your comments to help us understand the market better, and providing context can lead to more informative comments. Explaining what we considered in writing the proposal makes it easier to craft specific responses or to draw our attention to something you think we’ve missed. Comments that provide new insight or information can be the ones that have the greatest impact on what we do next.

That leaves 415 pages. Only part of that is new rules, though. What else is left?
The technical and conforming amendments make sure the new rules don’t conflict with existing rules, that they make the right cross-references, etc. This actually accounts for more than half of the proposed regulatory language.

The proposed guidance explains what certain regulatory language means in context. For example, the phrase “within three business days” appears a lot in this notice, as in: a creditor must deliver the loan estimate disclosure “within three business days” of application. But what counts as a business day? If a bank is closed the Friday before an Independence Day that falls on Saturday, does that Friday count as a business day? (Answer for purposes of delivery of this disclosure: yes.) Providing guidance that clarifies issues like these can save time, energy, and costs for both industry and regulators.

And the signature gets its own page?
Yes. We don’t expect a lot of comments on that page.

So where can I comment on this notice of proposed rulemaking?
First, we hope you’ll take a look at the Know Before You Owe project that helped us develop the proposed disclosures. Then, review the rule and submit your comments at Regulations.gov.

Today, we are posting a semi-annual update of the CFPB’s rulemaking agenda. The Office of Management and Budget (OMB) has not published the full federal Unified Agenda yet, but this is the version we submitted to OMB.

Federal agencies typically release regulatory agendas twice a year. Each spring and fall, OMB works with the agencies to compile a list that outlines the rulemaking activities of all federal agencies for the coming 12-month cycle. It also includes recently-completed rulemakings. Cumulatively, the list is called the Unified Agenda of Federal Regulatory and Deregulatory Actions.

As an independent agency, we voluntarily participate in the Unified Agenda process. When OMB finalizes the spring 2012 Unified Agenda for the federal government as a whole, it will be published at www.reginfo.gov. To give the public additional time to consider our work prior to that, today we’re posting our final submission.

The CFPB’s agenda primarily includes rulemakings mandated by the Dodd-Frank Act. For example, we are working on several mortgage-related rules and rules to implement our supervisory program for certain non-bank entities. This includes two proposed rulemakings that we published for comment on Monday, July 9, relating to the Bureau’s Know Before You Owe mortgage disclosure integration project and setting forth new protections for high-cost mortgages. This also includes an initial rule to define nonbank “larger participants” that are subject to examination. The Bureau is publishing today a final rule regarding the Bureau’s supervision of larger participants in the credit reporting marketplace. We are also seeking your input on an Advance Notice of Proposed Rulemaking about the consumer general purpose reloadable prepaid card market.

Beyond specific rulemaking activity, we continue to work on a variety of initiatives that address issues in consumer financial markets. For example, last month we joined several other financial regulators in a memorandum of understanding to clarify the coordination of our supervision efforts. And Director Cordray recently met with Secretary of Education Arne Duncan and ten college presidents to finalize a commitment by those college and university systems to present clear financial aid offer information to all incoming students. They’re modeling this effort on the Financial Aid Shopping Sheet that the Department of Education and the CFPB developed last fall.

Stay tuned in this space for further semi-annual updates to the Bureau’s rulemaking calendar as we look ahead to 2013.

This is the third post in a series on the Know Before You Owe project for simplifying mortgage disclosures. Last week, we explored the origins of the project and the process that brought us to this point. Today, we’re explaining the proposed rule we’re issuing to make mortgage disclosures more effective and easier to use.

For the majority of Americans, buying a home means taking out a loan. A mortgage loan is the biggest financial commitment most of them will make in their lifetimes. With something so important, you ought to be able to get up-front, easy-to-understand information that lets you compare different loan offers and find the one that’s best for you.

That idea was the starting point for the Know Before You Owe mortgage disclosure project. The Dodd-Frank Act requires us to combine the Truth in Lending and Real Estate Settlement Procedures Act disclosures, and we began Know Before You Owe to make sure the people who would use the new forms were part of the process of creating them.

Today, we’re presenting the results. After more than a year of research, testing, writing, and review, we’re submitting a proposed rule to the Federal Register to create new, easier-to-use mortgage disclosures.

Take a closer look and learn more about it.

There is more to the proposal than just the forms. Today, rules known as “Regulation X” and “Regulation Z” tell industry how to fill out the forms. We are proposing new rules in Regulation Z to tell industry how to fill out the new forms. We are also proposing commentary that interprets the rules to help industry understand how to comply. To help you see how the rules and the commentary interact with each other and the forms, we are showing you the applicable rules and commentary for each section of the first page of the Loan Estimate.

We’re doing this to save you the trouble of flipping pages to find the right rule for filling out the form, and then flipping more pages to find the right comment to help you understand that rule. Instead of you hunting for the rules and commentary, they will come to you.

We think this is a helpful way to present the proposed rules and commentary to busy industry stakeholders. If this is useful, we will explore doing it for the rest of the rule. See for yourself.

The proposed rule and forms would have benefits for both consumers and industry:

• Simpler than the old forms. Lenders can explain the terms more easily using fewer forms. Consumers, meanwhile, can understand and compare different mortgages more effectively, and compare their estimated and final terms and costs more easily, helping them make the right decisions for themselves and their families.
• Highlight information consumers need. Interest rates, monthly payments, the loan amount, and closing costs are all right there on the first page. Also, the first page explains how the interest rates, payments, and loan amount might change over the life of the loan, including the highest they can go. The forms also offer more information about taxes, insurance, and other property costs so consumers can better understand the total cost.
• Easier to look out for risks. The forms provide clear warnings about features some consumers may want to avoid, such as adjustable interest rates and payments, prepayment penalties, and loan balances that increase (negative amortization). The proposed rule also contains provisions to make estimates more reliable. And because the proposed rule requires lenders to keep electronic copies of the forms they give to consumers, industry and regulators will be able to address compliance questions more easily.
• More time to consider choices. The lender or broker must give the estimate within three business days of applying, and they must receive the closing disclosure at least three business days before closing.

The rule will be published in the Federal Register soon, and when it is, we’ll update this blog post to let you know how to comment.

In the meantime, please, check out the new forms and the process that brought us here. We’ve got a lot more for you to explore: a side-by-side comparison of the new forms and the old ones, a visual timeline of how we got here, summaries for consumers and for industry, and reports on what we learned.

Thank you for all your hard work. We couldn’t have done this without you.

This is the post second in a series. Yesterday, we looked at the origins of the Know Before You Owe project for simplifying mortgages. Today, we look back at how the project unfolded. Very soon, we’ll issue a new proposed rule to make mortgage disclosure more effective and easier to use.

Hear from us when we propose the new mortgage disclosure rule

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In our last post, we mentioned that one question that we asked people to consider was: “What would you like to see improved on the form? Is there some way to make things a little bit clearer?” Soon, we’ll propose the rule that implements new mortgage disclosure forms, and you’ll be able to judge whether they’re better and clearer than the existing forms. (To get a message when we do, sign up to the right.)

For today, we want to take a look back at the work we did with your input to get to this point. This post is a little longer than most of what we write on this blog, but this partnership with the public has produced results that deserve a lot of recognition.

Know Before You Owe wasn’t actually the first step in the process of combining mortgage disclosures. Technically, the first step was the signing of the Dodd-Frank Act on July 21, 2010. The Act includes provisions requiring us to combine the Truth in Lending and Real Estate Settlement Procedures Act mortgage disclosures.

In November 2010, we joined the Treasury Department to host a symposium on mortgage disclosure with consumer advocates, government officials, psychologists, marketers, and representatives from the mortgage lending industry. The day was a jumping-off point for our efforts, a way to share and collect ideas for what kind of changes in disclosure would help consumers.

Before we could test forms, we needed forms to test. We needed something more specific than “What should we change about the current forms?” to give our testers some direction on what we were trying to achieve. So, starting with a blank piece of paper on a wall, we asked ourselves two questions: What information about the mortgage is useful to consumers? What information is useful to the industry? By using these questions as the framework for the forms’ legal requirements, we came away with a series of drafts that let us begin testing.

The testing process took us to cities across the country: Baltimore, Los Angeles, Albuquerque, Springfield (MA), and more. In each place, we tested new prototypes of the combined initial disclosure with different kinds of mortgages, different terms, and different comparisons of loans. For a few days in each city, we asked consumers, lenders, and mortgage brokers questions about our prototype forms. This exposed issues with the designs we were testing and made sure our design process was always user-centered.

As we were testing, we were also wrestling with another issue: how the new disclosure consumers receive after they apply for a loan would work with the disclosure consumers receive before they close on the mortgage. These forms need to work together. Consumers should be able to understand whether the final terms and costs of their loan have changed from the initial estimates.

To address this, after six months of testing the initial disclosure, we began testing a new combined closing disclosure. This form combined the HUD-1 Settlement Statement with the final Truth in Lending disclosure. We tested versions of this form in cities across the country like Des Moines, Birmingham, and Austin.

At the same time we began in-person testing of the initial disclosure in Baltimore in May 2011, we also posted the first two prototypes for comparison here on consumerfinance.gov. We created an online feedback tool that let people choose between two different prototypes, and then click on the parts of the forms they thought worked well or didn’t, found confusing or interesting, had suggestions for. Basically, we wanted any reaction that could help us learn and improve. They could then submit a comment telling us why they clicked on a particular part of the form. We also asked if there was anything missing.

The feedback was overwhelming. Over seven rounds of this online feedback tool, we received more than 27,000 user comments, split almost evenly between consumers and industry. And we used this feedback in a variety of ways. For example:

• We aggregated the results into heat maps that let us get a sense for which parts of the forms people paid attention to most. Each prototype generated a different click pattern, so we could analyze them against each other to understand how people’s reactions changed.
• We aggregated and analyzed the comments submitted along with clicks. Seeing what drew people’s attention is one thing. Learning the specifics of what they were concerned about or liked gave us more specific sentiments. These sentiments guided us for future versions of the prototypes and offered ideas for how to solve problem areas elsewhere in the form.
• We used the online results to supplement the in-person testing. In-person sessions functioned more like real-world mortgage applications than the online review did. Testing participants were asked more specific questions, like which of two loans they would choose or, for industry, how they would explain certain sections to consumers. Seeing how people would actually use a form suggested different things from seeing what they thought of it theoretically.

As we began focusing on writing the rule to implement new disclosure requirements earlier this year, we also started the small business review process. Mortgage disclosure is important to a variety of small businesses, such as lenders, mortgage brokers, and settlement agents. We asked for their feedback on the potential impacts of complying with various proposals we were considering.

When we release the proposed rule and forms, we’ll also release reports on both the testing that led us here and the small business review that gave us feedback on particular proposals. The reports will offer some context for the heart of the work: the new proposed rule and the forms. Make sure you hear from us when it’s available.