CFPB’s proposed disclosures raise questions within lending industry

The Consumer Financial Protection Bureau’s proposed mortgage forms are generating just as many comments as they are kudos – from individual lenders, industry trade associations, consumer groups, vendors, and the many others they will impact.

While many have lauded the proposed Good Faith Estimate/Truth in Lending disclosure as a step in the right direction, many question how the new, two-page form can include some of the features proposed without a change in regulations. They worry about the lead time to make the changes, the cost involved, and whether the new form will make a difference to borrowers.

Mandated by the Dodd-Frank Act, mention of the effort – dubbed “Know Before You Owe” – first appeared on the CFPB blog May 9, followed by a May 11 post that provided details about the scope of the project. The CFPB said it would request comments on the proposed disclosures online and would also visit cities across the country to test the draft disclosure forms, interviewing consumers, lenders and brokers for feedback on the forms.

“After five rounds of this testing, in six cities and with your input online, we expect the revised form to be a lot better than the old ones. Then, after consulting with other regulators and small businesses, we will issue a proposed rule and give the public a chance to submit written comments on the revised form. … After that, we will go through the comments, make any needed changes, possibly do one last test, and come out with a final rule unveiling the final version of the form,” the CFPB blog explained.

On May 18, the Bureau shared Round 1 of its two model forms, “Ficus” and “Pecan” on its web site.

Comments and concerns
By June 8, the Bureau’s Know Before You Owe web page received more than 78,000 visits from 35,000 unique visitors and the two proposed forms had generated thousands of comments. When broken down by ZIP code, the highest number of comments came from Washington, D.C. (36), followed by Columbus, Ohio (18), Minneapolis (18), Chicago (18) and Austin, Texas (18).

Most recently, the Bureau reported that more than 14,000 people had selected one of the two versions of the Round 1 forms. They also received more than 13,000 individual comments on the forms. Quickly incorporating this feedback, the CFPB rolled out Round 2 on June 27 – the

 “Dogwood” and “Redbud” forms. Comments were due by July 5.

ICBA Mortgage, a division of the Independent Community Bankers of America, was pleased to see that the CFPB had made changes in Round 2 that the banking industry had recommended, said Ron Haynie, president and CEO.

But compliance costs remain a concern. “It’s only been 18 months since we had to go through this the last time,” Haynie said of the revised Good Faith Estimate that has been in use since Jan. 1, 2010. Before coming to ICBA Mortgage, Haynie was vice president-mortgage lending at Home Federal Bank in Nampa, Idaho, where it cost $4,000 to implement the new GFE.

“The cost is going to vary from bank to bank, but there are the systems and technology upgrades that you’ll have to do, then the training. Certainly, I would encourage the Bureau to provide good lead time on this,” Haynie said.

“What we’ve voiced to the Bureau is that, considering the compliance cost that it does cost for our members, and the burden that is entailed with making changes, we want them to be very thorough in the changes they make this time around,” added Elizabeth Eurgubian, ICBA vice president and regulatory counsel.

The Mortgage Bankers Association, in a formal comment letter submitted to the CFPB on July 5, took issue with the short comment period for Round 2.

“[W]e do not believe the week long comment period provided, which included the July 4th holiday, was sufficient. This is especially so considering that comments are sought on the presentation of closing costs. This is a matter that the Department of Housing and Urban Development (HUD) considered for several years through two successive rulemakings that engendered tens of thousands of comments,” wrote Stephen A. O’Connor, senior vice president, public policy and industry relations for the MBA.

MBA points out the prototypes are inconsistent with current TILA and RESPA rules. The forms group together fees that have 0 and 10 percent tolerances with those that do not, and also combine origination fees with fees tied to the interest rate, which can change. One proposed form uses terminology that differs from current RESPA terminology.

The forms also pose many operational challenges, because many software providers are unable to produce forms that contain the kinds of shading, dots and arrows in the prototypes, the association explains.

Making comparisons

The staff at Financial Institution Products Corp., or FIPCO, the forms and software subsidiary of the Wisconsin Bankers Association, put together a “slew” of comments on the proposed forms, said Pam Kelly, FIPCO president and CEO.

But the chief concern among them is that “right now the templates don’t meet some of basic requirements of Truth in Lending. That’s a really big problem because the law isn’t changing,” Kelly said.

As soon as the forms were first introduced online, WBA and FIPCO sent the link to bankers throughout the state so they could submit feedback.

Given that 13,000 comments submitted, Kelly questioned the knowledge behind some of the feedback the CFPB had received. “Are the people who are commenting people who know a banking form in the first place?” she wondered.

Kelly also questions software vendors’ ability to program the forms to look exactly like the prototypes. And because of the time required to make all of the programming updates, with legal reviews each step of the way, she is hoping for adequate time to implement the changes once they are finalized and approved.

Like some of the commenters on the CFPB blog, Kelly and ICBA’s Haynie believe that encouraging consumers to use the combined form to “comparison shop” among financial institutions could be problematic.

Haynie sees a bigger issue that should be examined.

“In the ideal world, the borrower wants to see what kind of financing options are out there before he goes selecting properties,” Haynie said. “Today, we can’t issue a GFE unless there’s a property address. If I’m out to buy a house, I don’t know what my new address is going to be, and my lender cannot issue a Good Faith Estimate. That part of the process needs to be addressed. If you’re able to put in ‘Property TBD,’ basing it on a sales price of X and a mortgage amount of Y … that would give the form a lot more utility,” he said.

In a story on the MortgageOrb web site, CEO Doug Lebda said, “It’s great to see the CFPB taking steps to streamline the mortgage financing process and make comparison shopping easier for all borrowers.”

The company recently conducted a survey that found that nearly 40 percent of all consumers get only one home loan quote, and almost 70 percent find the process of shopping for a mortgage frustrating.

Engaging the industry

The CFPB has been quick to point out that they had solicited feedback from various constituencies well before introducing Know Before You Owe in May.

In testimony before the House Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs on May 24, Elizabeth Warren, the de facto head of the agency, said that the Treasury Department had sponsored a symposium during her first week on the job, in September 2010. The event brought together lenders and consumer advocates to discuss how to simplify federal mortgage disclosures. Consumers find them “hard to use,” Warren told members of Congress, and community banks and credit unions said the forms “produced little value for borrowers.”

The CFPB met with representatives of many of the major trade associations before the public unveiling of the forms, according to online news articles.

Another valuable tool in assessing the prototypes has been a technology called heatmapping.

A feedback tool on the CFPB web site analyzed the 13,000-plus clicks on the Round 1 forms and compiled them into a map of the areas that visitors “touched” most and least often. For example, the heatmaps showed that the key areas of interest were the full loan amount on page 1, the project payments section at the bottom of page 1, and the estimated closing payment on page 2. People paid more attention to the first page than the second, even though the second page contains key information, such as a breakdown of closing costs.

A final version of the combined form is expected in July 2012, but before then, the CFPB will have to address concerns about whether the forms will in fact require changes to RESPA and TILA.

Fredrikson & Byron Law