Mortgages

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.

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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.

This post is the first in a series. Today, we look at the origins of the Know Before You Owe project for simplifying mortgage disclosures. Tomorrow, we’ll look back at how the project unfolded. And very soon, we’ll explain a new proposed rule the CFPB is issuing to make mortgage disclosures more effective and easier to use.

Hear from us when we propose the new mortgage disclosure rule

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Over the past thirteen months, the CFPB has developed a series of projects under the name Know Before You Owe: for mortgages, for student loans, and for credit cards. The idea is simple: When you buy a financial product or service, you should understand the terms you’re being offered before you sign on the dotted line. You should be able to compare different products effectively and make the right choices for yourself and your family. And the information you use to make those decisions should be clear, effective, and easy to understand.

In short, we believe in making disclosures simpler and more effective, and doing it with the input of the people who will actually use them. “Know Before You Owe” is our name for this participatory approach.

Where do mortgages come in? The CFPB is combining the existing disclosures you get when you apply for and close on a mortgage – the Truth in Lending disclosures, the Good Faith Estimate, and the HUD-1 Settlement Statement– into a single, and ideally simpler, set of forms. In May 2011, we began that effort with the disclosure you get after you apply.

Here’s what we said then:

If you’ve ever applied for a mortgage loan, you’ve received two forms required by federal law: a two-page Truth in Lending form and a three-page Good Faith Estimate. They are meant to give you the basic facts about home loans that you apply for and to help you pick the mortgage product that’s best for you. But these forms have overlapping information and complicated terms and are just plain difficult to understand.

We wanted the lenders, mortgage brokers, settlement agents, and consumers who will use the new combined forms to help as we developed them. We visited cities around the country to get in-depth feedback on how well the forms worked. We posted them online and asked for both consumer and industry feedback. Finally, we took extra steps to speak to small businesses affected by mortgage disclosures about their concerns, and we consulted with appropriate federal agencies.

As we started this process, we put forth three questions to define our approach to creating the new forms:

• Would the forms help consumers understand the true costs and risks of a mortgage?
• Could lenders and brokers clearly and easily explain the forms to their customers?
• What could be improved on the forms? Is there some way to make things a little bit clearer?

Over the past year, we’ve heard from consumers, designers, policymakers, financial institutions, legal and regulatory experts, systems vendors, and thousands of lenders, settlement agents, mortgage brokers, appraisers, closing attorneys, title agents, and real estate agents. Now, we’re almost ready to share the results: a proposed rule that meets our statutory obligation, and a single, simplified set of proposed forms.

Soon, we will submit a Notice of Proposed Rulemaking to the Federal Register to begin the public notice-and-comment process. When we submit the proposed rule, we’re also going to release a lot of interesting information here on our site: a side-by-side comparison of the existing forms and the new ones, reports on what we learned from testing the forms and from our discussions with small businesses, a timeline of the project leading up to this point, and a new way of presenting the rules and commentary that tell industry how to fill out the forms.

Tomorrow we’ll go into how we got here. For now, sign up here if you want us to tell you as soon as we release the notice.

Today, we released a Report to Congress on reverse mortgages. http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf

The Dodd-Frank Act, which created the CFPB, specifically recognized the unique financial needs of older Americans. Our Office of Older Americans is dedicated to protecting this population. In that effort we have taken a special look at one financial product only sold to them: reverse mortgages. Today’s report presents the findings of that study.

A reverse mortgage is a special type of home loan that allows older homeowners to access the equity they have built up in their homes now, and defer payment of the loan until they pass away, sell, or move out of the home. Reverse mortgages require no monthly mortgage payments, but borrowers are still responsible for property taxes and homeowner’s insurance.

Our study finds that reverse mortgages are complex products that are difficult for consumers to understand. Borrowers are also increasingly using reverse mortgages in ways that are different from what was intended. Nearly half of recent borrowers were in their 60s, and nearly 3 out of 4 borrowers took all of their money upfront in a lump sum. The Bureau is concerned that these borrowers will have fewer resources to pay for everyday and major expenses later in life.

Deceptive marketing is a long-standing problem in this market, with many older Americans receiving solicitations implying that a reverse mortgage is a government benefit rather than a loan. Prospective borrowers are required to attend counseling, but these deceptive advertisements and an increased array of product options make the counselor’s job very difficult.

We have submitted a Notice and Request for Information to gather public input on follow-up questions about reverse mortgages. We are seeking feedback on the factors most important to consumers when they are considering a reverse mortgage, the way consumers use reverse mortgage proceeds, the longer-term outcomes of reverse mortgage borrowers, and certain practices that may differ depending on the type of business that is offering the reverse mortgage . Sign up for our email list and we’ll notify you when the comment period opens. You can view the Request for Information here

Additionally, our Office of Older Americans released a 4-page consumer guide to reverse mortgages and a new and improved set of answers to common reverse mortgages questions on Ask CFPB. We’re also taking complaints on reverse mortgages through our complaint system.

Last week the Federal Reserve released a video on the Independent Foreclosure Review. The video aims to help borrowers who believe they were financially harmed during foreclosure processes between 2009 and 2010. Because we hear from consumers each day who have questions and concerns regarding their mortgages and foreclosures, we want to pass on good information they may find useful.

Many borrowers across the country have gone through foreclosure in recent years. Sometimes consumers went through the process with unanswered questions and concerns about how their foreclosure was handled. And in some cases, there were major errors made by servicers that led to foreclosures that could have been avoided. Because of these practices, the Independent Foreclosure Review has been established to assist borrowers in getting answers and possibly compensation. The Federal Reserve has set up a website for you to learn more about the Independent Foreclosure Review. The Federal Reserve offers an English language video and a Spanish language video that provide greater details, but here are the basics:

1. Your mortgage must have been serviced by a participating servicer.
2. Your foreclosure must have been initiated, processed, and/or completed between January 1, 2009 and December 31, 2010.
3. The foreclosure had to be for your primary residence.

Please note that there are absolutely no fees attached to this process. Beware of anyone who asks you to give them money.

To submit complaints, inquiries, feedback, or to tell the CFPB about an experience you’ve had with your mortgage, you can call our toll-free phone number at 1-855-411-CFPB (2372) or submit a complaint online. Consumers who are experiencing problems because they are unable to pay their mortgage can also call us at 1-855-411-CFPB and we will connect them with local housing experts who can provide free and professional advice.

We all make mistakes. That’s part of what makes us human. When we can, we learn from our mistakes. That’s why we at the Consumer Financial Protection Bureau want to understand more about the most common errors consumers make about money. We want to find better ways to help others avoid these mistakes in the future.

For example, many consumers make credit card and loan decisions without shopping for the best rates and terms. Others set goals – like saving more for retirement or for the down payment on a home – but don’t follow through. Many people live paycheck-to-paycheck, but never take the steps necessary to plan their spending, reduce their debt, or save for sudden expenses.

We would like to give you a chance to tell us about common money mistakes. Tell us about:

• Errors you’ve made;
• Mistakes you’ve seen others make;
• Habits and practices that make good choices more difficult; and
• What you wish you had known sooner or would do differently next time.

Please e-mail your comments to FinancialEducation@CFPB.gov.

(Note: Do not discuss personally identifiable information or private issues in the comments area below. If you have a complaint about a specific product or company, please enter it here.)

This post also appears on the Department of the Treasury blog.

Our military families make many sacrifices for our nation, and not just when a servicemember goes into combat. Military families also face challenges when a servicemember receives orders for a Permanent Change of Station (PCS) move to another base, and the family has to decide whether to go along or live apart. Unfortunately, for many military families, this challenge has become more difficult in the wake of the housing market downturn. This is because like other Americans, many military homeowners are currently underwater on their mortgage. Because their home’s value has decreased since they purchased it, these servicemembers may not be able to sell their home at a price that will pay off their mortgage, and they may not be able to rent out their home at a price that will cover their monthly mortgage payments. These military homeowners also may get a lower housing allowance at their new duty station, and may face additional loss of income while their spouse looks for a new job. Suddenly, military homeowners who have been faithfully paying their mortgage on time face a real risk of falling behind.

In the last few weeks, Treasury and the Office of Servicemember Affairs at the CFPB have worked together to address this issue. And, as a result, Treasury is making important changes to its Home Affordable Modification Program (HAMP) that will provide more opportunities for mortgage assistance to military homeowners.

Many underwater military homeowners have looked for help from mortgage assistance programs to no avail. If they move, they may be told that they are not eligible to modify the mortgage on their home because it’s no longer their primary residence. And they may not qualify for assistance because they are still current on their mortgage or their income has not changed, so they are not considered to have a “verifiable financial hardship,” despite the fact that they now have to pay for housing in two locations. The financial difficulties are stressful enough, but for military homeowners, becoming delinquent on their mortgage can also put their security clearance at risk. If they show a negative change to their credit rating, it not only hurts their ability to get credit, but can actually cause them to lose the security clearance they must have to do their job.

Under recently announced changes to HAMP, which will go into effect June 1, military homeowners and other families who are permanently displaced by a job-related move may still qualify as owner-occupants, which means they may still qualify for a HAMP mortgage modification. The new criteria states that a borrower may qualify if he or she:

• Is displaced due to an out-of-area job transfer such as PCS orders and was occupying the home as a principal residence immediately prior to the displacement;
• Intends to return to the home at some point in the future; and
• Does not own any other single-family real estate.

Military and other families who do own other residential properties may still qualify for a HAMP modification under expanded opportunities available for rental properties announced by Treasury in January. They also may qualify for a short sale through Treasury’s Home Affordable Foreclosure Alternatives Program (HAFA).

Our servicemembers deserve our full support. We don’t want any member of our military to be forced by financial challenges to leave their family behind. This would be a heartbreaking decision for any family, but it’s especially tough for military families, who often face long periods of separation during deployment. These changes to HAMP are one way Treasury and the CFPB are working together to support military families and the many other hardworking families struggling to maintain homeownership.

Tim Massad is the Assistant Secretary for Financial Stability at the U.S. Department of the Treasury and Holly Petraeus is the Assistant Director for Servicemember Affairs at the Consumer Financial Protection Bureau.