On Nov. 20, the Consumer Financial Protection Bureau combined two sets of disclosures: those given to consumers after they apply for a loan and those given consumers before finalizing a loan.
Federal law requires mortgage lenders to deliver two different disclosure forms to consumers. Within three business days of applying for a loan the consumer receives an early Truth in Lending Statement and a Good Faith Estimate. At the closing stage of the transaction, federal law generally requires that two different disclosure forms again be provided to consumers: a HUD-1 settlement statement and, most of the time, a final Truth in Lending Statement. The Dodd-Frank Act required the CFPB to integrate these two sets of disclosures.
Under the new rules, consumers will get a single form shortly after applying for a loan, known as the Loan Estimate. They also will get just one form shortly before finalizing a loan, known as the Closing Disclosure.
The CFPB worked for more than two years to design the forms to enable consumers to spot crucial information readily. The bureau tested different prototypes and received more than 27,000 comments on them on its website. It also conducted a study in which consumers compared the current disclosures to the new ones. Test results showed that consumers understood the new forms better in key respects.
Some of the improvements were substantial, according to CFPB Director Richard Cordray, who spoke in Boston about the new disclosures on Nov. 20. Consumers using the new forms provided more correct answers about sample mortgages, scoring 29 percent better than those not using the new forms.
Cordray said other changes had an even more dramatic effect. “By identifying the loan amount in a big, bold font, and making it one of the first things a consumer sees, consumers were far better able to recognize it. Their performance on this point improved by as much as 75 percent,” he said. “For consumers presented with complicated loan products like adjustable rate mortgages, their ability to compare the highest possible total monthly payment between two loans improved by 98 percent.”
While the new disclosures are applied to both large banks and small banks, the CFPB accommodated small banks in a few different ways. The rule that implements the new disclosures is 1,888 pages long; the bureau extended the implementation date to Aug. 1, 2015.
The Independent Community Bankers of America expressed concern with the size and complexity of this final rule but said the CFPB has clearly heeded the community banking industry’s feedback on new disclosure forms, ICBA said.
The combined documents are clearer than existing disclosures and should be easier for consumers to understand, ICBA said.
The CFPB also dropped its proposal to require mortgage lenders to maintain copies of the Loan Estimate and Closing Disclosure forms in machine-readable form. The requirement would have required an expensive retooling of lenders’ document-storage systems on a massive scale.
The bureau also built some tolerances for minor changes to the Closing Disclosure form. ICBA still expressed concern that the final rule’s requirement that borrowers receive disclosures three business days prior to settlement could result in delays and cost increases.