Consumer Bureau Proposes New Mortgage Disclosure Rules

BY JESSICA SILVER-GREENBERG
Reprinted from www.nytimes.com

As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau on Monday issued proposed rules to bolster fairness and clarity in residential lending, including requiring a loan estimate of costs for homebuyers.

The proposed rules have two central elements — the loan estimate and the closing disclosure — that would provide would-be homebuyers with a simple accounting of likely payments and fees to prevent costly surprises.

The rules are part of a broader reform of the mortgage market, including restrictions the consumer bureau outlined in May. They would prevent mortgage companies from hitting consumers with transaction fees tied to interest rates and the amount of the loan.

Under Monday’s rules, within three days of applying for a loan, consumers would receive a loan estimate that outlined the terms, including how much interest they would pay, how that might shift over the life of the loan and the highest loan amount that consumers could face.

Lenders would have to clearly outline potential pitfalls or risky types of mortgages that have felled borrowers in the past. Lenders, for example, would have to tell consumers about the dangers of a negative amortization loan, when a loan balance increases when borrowers opt to make interest-only payments and fall behind.

In the three-page loan estimate, consumers would also be told about some mortgage elements that they might want to avoid, including prepayment penalties.

In addition, the rules would make lenders provide more information about potential closing costs at least three days before closing. The five-page closing-cost form would allow borrowers to avoid any surprise payments at the signing table.

“When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal,” Richard Cordray, the director of the bureau, said in a statement.

The rules are open to public comment until Nov. 6.

For the most part, both consumer advocacy and industry groups broadly supported the proposed rules.

“We do think that these forms are better, in part, because there is a more prominent disclosure on prepayment penalties,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a nonprofit group that works to end abusive financial practices.

However, Diane Thompson, a lawyer with the National Consumer Law Center, said that while she welcomed greater transparency in pricing for homeowners, she thought that the forms should emphasize clearly on the first page what the total cost of the loan would be, including interest, closing costs and principal.

The Mortgage Bankers Association, an industry group, said that lenders understood that faulty disclosures might have led homeowners to shoulder loans that they could not afford.

But David Stevens, the group’s president and chief executive, said that he worried that the 120-day public comment period could limit consumer advocates and mortgage lenders from conducting a thorough review, especially because the proposal was more than 1,000 pages long.

“I applaud the Consumer Financial Protection Bureau for this effort,” he said. “But this rapid timeline for the comment period is worrisome.”

As it heads toward its anniversary on July 21, the consumer bureau is defining its most pressing goals while battling Republican lawmakers who have said the agency lacks accountability.

Created by the Dodd-Frank financial regulation law in 2010, the bureau is making headway toward its consumer protection goals, including examining the private student loan market and starting a database of complaints against credit card companies.

The bureau studied issues facing consumers for more than a year to determine which areas needed the greatest improvement, focusing on payday loan companies, private student lenders and mortgage companies.

The subprime lending crisis exposed the dangers that arose when homebuyers were not fully aware of the costs of their mortgages.

Since 2006, when the housing market began imploding, about eight million Americans have lost their homes to foreclosure.

“Entire neighborhoods have been swamped by foreclosures, affecting even people with sensible mortgages who had been faithfully making their payments on time,” Mr. Cordray said in a speech Monday to the National Council of La Raza in Las Vegas.

Customers considering “high cost mortgages,” which the bureau is now defining, would receive even greater protections under the proposed federal guidelines. The rules would prevent lenders from charging borrowers a balloon payment, which is typically a large lump sum amount due at the end of the loan term.

Banks would also be barred from levying fees for modifying the loans, or for charging borrowers for a payoff statement, which generally gives homeowners an estimate of how much money is needed to pay off their loan.

In addition, servicers would be prevented from charging excessive late payment fees.

The public comment period for the high-cost mortgage rule ends Sept. 7.

Later this summer, the consumer bureau will also take aim at mortgage servicers, which collect payments on behalf of the banks and seize homes when loans default.

Problems plaguing the mortgage market were at the center of a $25 billion settlement reached in February between state attorneys general and the nation’s largest banks.

Regulators accused the banks of robo-signing, the practice of employees churning through documents used in foreclosures without reviewing them for accuracy.

The consumer bureau intends to propose rules that require servicers to credit payments to a borrower’s account promptly, responding to complaints that servicers sometimes delayed registering a payment, initiating a hefty late fee.

Servicers would also be required to institute clear procedures to prevent lost documents, reduce errors and provide more information to strug