Know Before You Owe: Designing a New Disclosure

By Patricia McCoy

This is the second in a series of blog posts about the Know Before You Owe project. To stay informed, sign up for e-mail updates.

If you were designing a better mortgage disclosure form, how would you do it and where would you start? Over the past several months, we have been hard at work thinking about these questions.

We started with the current disclosure forms, studying their strengths and weaknesses. We’ve also met with lots of different experts – from consumer advocates, regulators, and industry representatives to researchers and graphic designers — to get their thoughts. These people gave us a lot of ideas about what information matters most when choosing a mortgage loan and how to communicate it clearly.

But expert input isn’t enough because it leaves out an important set of voices. We also need to hear from consumers, who need the disclosure to be clear so they understand the loan terms they’re being offered – and can compare different offers easily. We need to hear from you.

So, over the next few months, we will share our draft designs with you, right here on this website. As we create and revise different versions of the mortgage disclosure form – remember, we’re combining two forms into one! – we will post them online and ask what you think.

Maybe the total cost of the loan should be clearer. Maybe some information would look better as a graph than as a list of numbers. Maybe there are some terms that make sense to technical experts but sound like gibberish to individual consumers. That’s the kind of input we need to design a better disclosure.

You can start right now by signing up on our Know Before You Owe page. Once you do, you’ll get an e-mail when it’s time to weigh in. We’re going to revise and repost the draft form repeatedly over the next several months, so getting quick feedback from you is especially helpful.

Also, use the “share” links on that page to spread the word. If you know anyone who is thinking about applying for a mortgage loan, or who has one and is struggling to understand it, we want to hear from him or her too. We want your help to get the word out.

As we ask for your comments online, we’ll also visit cities across the country to test the draft disclosure forms. During our visits, we will interview consumers, lenders, and brokers about what they find helpful or confusing in our draft designs.

After five rounds of this testing, in six cities and with your input online, we expect the revised form to be a lot better than the old ones. Then, after consulting with other regulators and small businesses, we will issue a proposed rule and give the public a chance to submit written comments on the revised form. It’s one more chance to weigh in on our proposed final design. After that, we will go through the comments, make any needed changes, possibly do one last test, and come out with a final rule unveiling the final version of the form.

We hope our continued outreach will allow us to make the disclosure better and better, learning what works and what doesn’t, until we have a product that makes a real difference for consumers. So visit this site often, and remember to sign up so that you know when it’s time to have your say. Share your opinions freely! Down the road, the disclosure we design together may be the one that you or someone you care about will use when applying for a mortgage loan. So, it has to work for you. That’s the bottom line.

Frankheartland

Kudos to you and the CFPB for this very worthwhile endeavor. I have been working on a design to simplify the process and create a translation mechanism for consumers, as I can honestly say that after 16 years as a mortgage broker never have the disclosures been so convoluted and unnecessarily complex. Why was a one page form with itemization of fees that was required not only to be disclosed within 3 days of application AND WHICH HAD TO BE EXECUTED BY BOTH THE ORIGINATOR AND THE BORROWERS replaced by a 3 page lump sum form that does not have to be executed by all parties? There is a very simple way to fix the current disclosures so they actually provide information that PROTECTS the consumer, but it will require a mindset shift beyond just ‘understanding the terms they are being offer so they can compare them more easy. I would love a seat at the table at CFPB to discuss this more

Christina

While I don’t agree with the lump sum format, I prefer the itemization of fees approach, I am ok with the fact that the form does not have to be executed. It is an informational disclosure so signatures should not be required. We do provide a cover letter that includes signatures lines. We mark whether the forms were mailed or received in person for the auditors benefit. We encourage the borrower to sign and return the forms but it is not required.

Frankheartland

Sorry to post again, but here is one thing that is missing from this discussion:

Why is there nothing disclosing the estimated value of the collateral, and where that value falls based on a historical perspective? Shouldn’t the borrower at least have some disclosure as to whether she is borrowing 96.5% for FHA financing on a house that is 20% above the historical norms for the past 25 years in the area she is buying, or whether values are declining rapidly in the same area? When a consumer gets a prospectus to purchase a mutual fund, it generally provides performance metrics based on 1 yr, 5 year, 10 year history. Would subprime lending have done the same damage to the economic infrastructure if there had been some “CFPB” value bubble warning? Hmmm…..

Tired Compliance Officer

That type of disclosure should be part of the sales contract from the seller’s broker. Everyone needs to remember it was not just banks that caused the bubble – there were a TON of newly hatched real estate agents and house-flippers looking to make a quick buck. If you try to pin the policing of it on the banks, what will happen is the smaller banks and credit unions will bow out of that kind of lending because of the huge liability, and you will end up with mortgages only being offered by a few large lenders and unregulated mortgage brokers.

I’m sure the mega-banks would love to monopolize the market, but in the end, consumers will lose out because their local banks will no longer be available as a source of financing. I do third party audits in the banking industry and every day, I see more and more small community-based banks simply give up mortgage lending because of the cost to comply with all of the new requirements.

Christina_8486

I believe adding the owner’s title policy to the borrower’s fees is confusing. That is normally a seller’s fee. If the fee is to remain then I believe there needs to be a statment added clarifying that and refer them to their sales contract.
I have always felt the 3 day requirement was unrealistic but even more so in today’s lending environment. This especially in out of town property situations. There is nothing magical about 3 days, someone just pulled that out of the air. I would like to see how our government/regulators would perform if required to produced an accurate document with all the complexities of a real estate transaction in 3 days!
There also needs to be more consumer education. Borrowers hear about the mortgage crisis on TV but don’t understand how that impacts them and all the people involved in the buy/sell process. Realtors are another group that needs education. From what I see the associations that govern that industry have not educated or done a good job of educating their members. All they know is it takes longer to close the transaction.

frank

Christina–you are getting closer to the core of the problem–consumer education. So let me ask you: is it possible that the focus of disclosures is too narrow: providing details of the terms/rates/fees really means nothing unless a consumer knows what they mean as it relates to the FINANCIAL OBJECTIVE they are trying to accomplish in the case of a refinance, or the affordability threshold if it is a purchase. And one thing that continues to be overlooked is that this was more than a “mortgage crisis”, this was a speculative housing bubble crisis. Why shouldn’t the disclosure require a “prospectus” style disclosure about 1 year, 5 year and 10 year value trends of the property they are financing? It is time to think outside the narrow box since RESPA and TILA have obviously failed to be effective for consumer protection in mortgage lending….

Tired Compliance Officer

Frank – really – A Prospectus? You expect consumers to read and understand a prospectus about their house? And who is gong to prepare that prospectus? Who is going to set the standards for preparing one? Who is going to audit them to ensure they were prepared according to the standard? Who is going to do a historical review to ensure the standards are providing accurate information over time?

How about a real simple disclosure that says – IF YOU ARE BUYING THIS HOUSE IN THE BELIEF THAT YOU CAN DOUBLE YOUR MONEY IN LESS THAN 10 YEARS, YOU SHOULD NOT BE TAKING OUT A LOAN TO BUY IT.

Either that, or the government can prepare a standard historical analysis of real estate markets and provide a standard disclosure that the bank can simply provide. Trying to make the banks responsible for the highs and lows of real estate markets will simply discourage all but the very largest institutions from bothering to make mortgage loans. Monopoly is never a good thing unless you are Parker Brothers.

http://www.kaltechsolutions.com website development

I support you Christina.

http://www.rugsinternational.net Rugs

@Christina I would strongly recommend as what you’ve mentioned and what should’ve done. :-)
Dulcinea

You have to go to FHA guru’s website (I’m not affiliated in any way, just a seeker of information) and if you read nothing else, read this page: http://www.yourfhaguru.com/Become-A-Rate-Shopping-Genius.html and this one: http://www.yourfhaguru.com/Stealth_Shopper.html Beware, the website is not very well, um, how shall I say, ‘crafted’, but it does have valuable information. Essentially, he argues that the consumer has a right to obtain information that is standardized across lenders so he can compare the costs of the same loan. He does this by requesting information based on a single rate at each lender. All of this happens before any application is completed, including asking for a Good Faith Estimate. Of course, he doesn’t always get that information (and neither will you), but you can take that itself into account when considering who to buy your loan from.(So, so glad I found his website.)
http://twitter.com/jtenn James Tennier

Why does the federal government not forget about fractional banking and just make “mortgages” directly to potential homeowners, based on the replacement cost of a dwelling, thereby turning it into a “home” not an investment.

Investing in this day and age should be limited to those with too much money, too much time and not enough actual value in terms of what they personally contribute to society. Definitely restricted to their own personal money!!! Any losses should be born solely by themselves.

My form;

date
names
address of property
cost of replacement of property
amount borrowed from federal agency
term in months to be repaid
monthly amount paid to federal agency lending to homeowner
monthly cost as a percentage of verified present income
terms regarding homeowners insurance arrangements and those for property taxes
likelihood of homeowners being able to pay as agreed and resulting actions to be taken if homeowner fails to do so
terms to include no interest as fractional banking is not involved
Tired Compliance Officer

The CFBP needs to complete revise the Real Estate Settlement Procedures Act (RESPA) as it pertains to lenders and align it with the Truth In Lending Act (Reg. Z) so that the disclosures do not contradict one another. Right now, RESPA requires lenders to disclose fees that the LENDER is paying, while Reg. Z prohibits those disclosures.

Right now, if a lender wants to do a “no closing cost loan” where-in the lender pays for the appraisal, title, credit reports, etc., IT STILL MUST SHOW THOSE FEES on the Good Faith Estimate and HUD-1 but the lender CANNOT show those fees on the Truth In Lending disclosure. This leaves borrowers and loan processors confused as to what is really taking place, and a lot of banks and credit unions have had to resort to creating an “ad hoc” letter to explain the whole mess.

Then, to add insult to injury, RESPA now requires a lender to REFUND to the borrower any costs it may have over-estimated on a “no cost” loan. Most small banks have given up trying to make “no cost” loans, and indeed, many local community banks have given up consumer real estate lending altogether because the disclosures are too confusing and the liability of compliance risk outweighs any revenue that could be generated from those loans.

End result is that consumers have fewer and fewer local lenders to chose from while the large institutions and unregulated mortgage bankers continue to ignore a lot of the new requirements.
http://sorebuttcheeks.blogspot.com/ steroids

new disclosures are an interesting idea.
Anonymous

Forms like these are usually developed by government bureaucrats and/or industry technocrats that are trying to get their beans counted a certain way. That’s why most disclosure forms don’t speak very well to the average consumer. It sounds like you folks mean to avoid this mistake.
Michael Grant

Please take a look at the California Mortgage Loan Discosure form that is required in California. This form has been around for years and puts the current GFE to shame. It provides all the information any borrower could possibly want or need. If you want samples of this form email me and I will provide them.
Over-regulated Broker

Its very, very simple.

#1) Get rid of APR. Lets be honest, most people DO NOT know what it is or how to properly explain it. This goes for consumers, mortgage professionals and probably most of the folks at the CFPB.

#2) Lets get real and have a GFE that is signed. You say it is just an informational disclosure? I disagree, however, all of my informational disclosures are signed including Privacy Policy, FACTA, Settlement Service Provider List and on and on and ON!. We are bound by what we initially disclose on the GFE. There are sections with ZERO tolerance and 10 % tolerance. Seems a lot more than an informational disclosure to me, no? I don’t like cost to cures, thats for one thing.

#3) Get rid of the redundant, confusing mess which is the 2010 GFE. It should be exactly what it says it is, an ESTIMATE. An estimate should allow for CHANGES, yet section 801 amongst others have zero tolerance. Most importantly, incorporate the TIL, and GFE. First page should be the ITEMIZATION PAGE. This would replace the current GFE, and would clearly outline and itemize the costs associated with the loan. Page 2 would replace the TIL, and would include and explain the terms.

What a breath of fresh air it would be to the unknowing consumer and lending industry if the CFPB took a “what makes sense” stance instead of a bureaucratic one.

I really want to unleash my fury pertaining to the LO Comp Rule, but that is for another time.
John G.

A couple of thoughts here.

1. The sheer volumn of disclosures gaurantees that most consumers will never read them or try and understand what information is being disclosed or why they should be concerned. Cut the volume. 80% could be condensed to a 3 or 4 page booklet that applies to all loans. These would be things like the the Equal Credit Opportunity Act, FCRA & FACTA disclosures, right to receive an appraisal copy (after all, providing a copy before closing is required.)

2. Then give the consumer the information THEY want about there loan: What will it cost and what will my payment be. If the payment can change, how, why, when and what will the future payments potentially be.

3. APR – Probably outmoded and useless to 99% of consumers. Perhaps a better disclosure would be a total cost of financing for 5, 10, 15 and 30 years (the total of closing costs, monthly payments and principal balance for each time period). Easy to calculate and consumers would understand and be able to compare easily.

4. Financial education is much needed. Asking a lender or mortgage broker do provide it amongst all the other decision making and emotions involved with a home purchase is counter productive. This should be taught in high school as an important life skill to all Americans.

5. Quit assuming every home buyer is working with an IQ of less than 80. Its fine to provide factual information but when the rules drive legitmate suppiers (community banks, small lenders, etc) out of the business, the consumers suffer. Make the big 3 & 1/2 (Wells Fargo, B of A, Chase and Citi) the provider of all loans and the consumer will suffer mightily. Some buyers have legitmate and smart reasons for trading rate for cost. Some buyers benefit from 3/1 or 5/1 ARM loans instead of fixed rate loans. Every time we regulate another choice from the table, some consumers are hurt – not helped.

6. I am not refering to the concept of throwing away underwriting standards and true risk evaluations (the essence of the sub prime loan). But most of the regs I have seen over the past 4 years seem to increase complexity, decrease consumer understanding, and increase cost to the consumer without any real benefit to the consumer. Adding additional regs and rules often seems to be a smokescreen designed to obscure the fact that regulators failed to use the tools on hand to prevent the mortgage crisis/equity meltdown.

7. Set limits – do not try and micro manage.

8. Simplify, simplify, simplify.
Bob

The form should explain percentage rates. Not simply say $200,000 at 10% fixed (not variable)

Example: Your $200,000 loan will cost $300 A MONTH. $100 is interest, $200 is towards the principle balance.

$3,600 is the ANNUAL cost. $1,200 in annual interest, $2,400 is towards the principle balance.

A 10, 20, 30 YEAR LOAN: will = this much in interest payments? @10 = $___ interest?, @20 = ?, @30 = ?

THE life of the LOAN YOU ARE TAKING WILL COST $78,000 in interest. TOTAL LOAN life = $278,000

That way you would know not just your interest rate (say 10%) and that you have a $200,000 loan with a $300 a month payment due, but that you actually will be buying and paying for a $278,000 loan and not simply $200,00 at 10% interest. Should be specific to each loan and interest rate not just some standardized pamphlet. It is amazing how much interest can accrue to, and simply seeing 10% and $200,000 perhaps is not the easiest way of making an informed decision.

It would make that base model $20,000 new car on the lot look more realistically like the $30,000 car it will become by the end of the loan period of 5 years. Not simply $200 a month anymore. If you make $20k a year in 5 years you have $100k and $30k is a large realistic chunk of your income to consider. Not simply $20K at 10% anymore or simply stated as $200 a month. And the $278,000 house is what you are purchasing - buying into not $300 a month or $200,000 at 10%. Those are the details. The purchase is the total. Seems the details obscure the purchase and that is how consumers get into debt troubles taking on more than they can handle. Handle over an extended time. $200 doesn’t seem like much for a car but it is actually part of the purchase of $30,000 which is almost a 3rd of a 20k income. Improving the understanding of what is actually being purchased will help.

Understand what I am saying. If you have to ask a car dealer, so how much is this going to cost me. The answer is either going to be $200 a month or $20,000 at 10%, and most likely the dealer will not say the total purchase is actually $30,000 financed and that is part of the bigger problem. I’d like to have interest rates described on paper, with possibly even an analysis of how much of my income annually and over the life of the loan the purchase will be.

Over-regulated Broker

I agree with CLEARLY defining TOTAL amount financed and TOTAL cost over the life of the loan. This is disclosed but should be simplified such as in the 2 page GFE/TIL model I was speaking of. This info would be on page 2. As for the yearly/monthly amounts paid to principle an interest, only way to CORRECTLY do that is with an Amortization schedule which I provide upon request.

The CFPB blog aims to facilitate conversations about our work. We want your comments to drive this conversation. Please be courteous, constructive, and on-topic. To help make the conversation productive, we encourage you to read our comment policy before posting. Comments on any post remain open for seven days from the date it was posted.