Even before its official first day of operation (July 21st), the Consumer Financial Protection Bureau (CFPB: consumerfinance.gov) has been hard at work. The newly formed bureau (created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) has been working toward their stated mission “…to make markets for consumer financial products and services work for Americans…”
What better way for the CFPB to begin its operations than to make an easy to understand mortgage disclosure? Back in May, the CFPB announced its creation of the “Know Before Your Owe” project, which has sought to consolidate mortgage disclosures as well as decrease the confusion of mortgage shopping. The “Know Before Your Owe” project will merge two lender disclosures: one required by the Real Estate Settlement Procedures Act (RESPA) and the second required by the Truth in Lending Act (TILA).
Devised as a protection for consumers from abusive and predatory lending practices, RESPA was enacted in 1974 as a “…consumer protection statute designed to help homebuyers be better shoppers in the home buying process…” As of July 21st, the CFPB has taken over administration and enforcement of RESPA, which was previously administered by the Department of Housing and Urban Development (HUD).
First enacted in 1968, TILA provides a framework for which lenders must inform consumers about the cost of their loan. TILA requires such disclosures as the Annual Percentage Rate (APR), finance charge, amount financed, and the total amount paid as scheduled. TILA is enforced by various government agencies, which now includes the CFPB.
RESPA and TILA require several disclosures to be provided to you within three days upon making your mortgage application, as well as not having changed prior to your closing of the transaction. Changes to these regulations and disclosures have often been made to keep up with the industry as well as to enhance consumer disclosure and education; the most recent round was after the financial crisis in 2008. Designed to be more efficient and accurate in providing information to consumers, the most recent changes to the Good Faith Estimate (GFE), along with the Truth in Lending Disclosure Statement, continue to be confusing for many people.
Many consumers were easily confused by past versions of the GFE and the Truth in Lending Disclosure Statement because it was difficult to compare mortgage costs between lenders; costs were not always labeled consistently. The new form seeks to standardize fee and cost disclosure such that making a comparison will be more like comparing two apples rather than an apple to an orange.
The combination of these two disclosures is not only an effort of the CFPB to increase transparency in the lending process, but it is also mandated by the “Dodd-Frank Act.” The “Know Before Your Owe” project began testing two versions of a new disclosure that would consolidate the combined five pages of overlapping information into one easy to follow form of two pages. The prototypes provide easy to follow information regarding the loan; and also include clear sections highlighting cautions, comparisons, lender fees and a loan summary.
Since testing began in May, the CPFB has been requesting feedback from consumers and professionals about the new disclosure. Although the finalized form is not expected to be in use until next year, you can view the prototypes as well as provide feedback on the CPFB website until September 19th.
by Dan Krell
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