Know Before You Owe: CFPB Replaces Mortgage Forms
The CFPB issued a rule on Wednesday that requires the use of new, simplified mortgage disclosure forms available in English and Spanish that detail the terms of a mortgage to homebuyers.
“The new ‘Know Before You Owe’ mortgage forms will replace the existing federal disclosures and help consumers understand their options, choose the deal that’s best for them, and avoid costly surprises at the closing table,” said a CFPB press release.
For the past 30 years, the CFPB said, federal law has required lenders to deliver two different forms to homebuyers within three business days after receiving a mortgage application, which often contained disclosures that overlapped.
Two more forms are delivered at the closing stage as well. Recognizing the need to streamline the process, The Dodd-Frank Wall Street Reform and Consumer Protection Act transferred authority over the existing forms to the CFPB.
“All of these forms contain duplicative and sometimes confusing information,” the CFPB said.
After two years of extensive research and testing, the CFPB said it has created two forms that fulfill the Dodd-Frank law’s intention of creating forms that are easier for consumers to understand.
The loan estimate form, provided within three business days after a loan application is submitted, will replace the truth in lending statement and the good faith estimate. The new form provides a summary of the loan terms, fees and estimated closing costs.
“Consumers can use this new form to compare the costs and features of different loans,” the CFPB said.
The closing disclosure form, received by consumers three business days before closing on a loan, will replace the final truth in lending statement and HUD-1 settlement statement. The new form will contain the accounting details of the transaction.
“The bureau received feedback from consumer testing, through the bureau’s website, from a small business review panel, through public comments on the proposed rule, and from other supplemental outreach,” the CFPB said in its announcement.
“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,” said CFPB Director Richard Cordray.
The CFPB claimed that a study has confirmed the benefits of the new disclosure forms, which take effect on Aug. 1, 2015.
“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. Testing showed that participants who used the CFPB’s new forms were better able to answer questions about a sample loan – a statistically significant improvement of 29%,” said the press release.
The CFPB said it partnered with a consumer research firm, Kleimann Communication Group, to design prototypes of the forms and conduct qualitative testing in nine cities.
In total, 92 consumer participants and 22 industry representatives were interviewed. The bureau also received 27,000 public comments on the prototypes followed by 3,000 comments on the proposed rule. From May to June of 2013, 858 consumers in 20 locations across the nation have tested the proposed forms, the bureau said.
“The CFPB used this additional testing to validate the effectiveness of its forms. All test results were statistically significant with a margin of error of plus or minus 4.7 percentage points and the overwhelming outcome was that CFPB’s new forms work better for consumers,” the bureau said.