On November 20, 2013, the Consumer Financial Protection Bureau (CFPB) issued a 1,887 page rule requiring mortgage lenders to use two new disclosures when making mortgage loans to consumers. The new forms are a "Loan Estimate," which replaces the preliminary Truth-in-Lending Disclosure Statement and Good Faith Estimate, and a "Closing Disclosure," which replaces the final Truth-in-Lending Disclosure Statement and HUD-1 Settlement Statement. Mortgage lenders must use the new forms by August 1, 2015.
The new forms are being mandated as part of the CFPB’s continuing effort to “make the mortgage market work better for consumers,” and arises out of the government’s response to the past financial crisis. According to the CFPB, the previous forms, which were mandated by the Truth-in-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) mandated by TILA and RESPA, including the TILA Disclosure Statement, Good Faith Estimate, and HUD-1 Settlement Statement, were confusing, contained contradictory information, and made it difficult for consumers to comparison shop. As a consequence, the CFPB believes consumers were confused about the terms of their loans and took out loans they could not afford. The problem was especially acute for high-risk, high-cost loans such as adjustable-rate mortgages provided to consumers with below-medium incomes. When housing prices did not rise as expected, these consumers were unable to refinance or sell their homes, resulting in significant numbers of foreclosures, and helping cause the 2008 financial meltdown.
Although the CFPB states that it conducted “more than two years of research, testing, and designing” to ensure that the forms are meaningful and less confusing, an examination of the forms reveals that they continue to require disclosure of a large amount of financial information, and so it is too soon to know whether these forms will actually benefit consumers in the end.
The Loan Estimate, which must be provided within three business days after consumers submit a loan application, is 3 pages long, contains an extensive amount of information for the consumer, including:
- “Loan Terms:” This section, on the first page, requires disclosure of the loan amount, interest rate, monthly principal and interest payments, and whether these amounts can increase after closing. This section also requires disclosure of whether the loan has a prepayment penalty and balloon payment, and the amount of any such payments.
- “Projected Payments:” Underneath the Loan Terms section, the form has a section listing the total monthly payment, divided into the expected principal and interest payments, mortgage insurance payments, and estimated escrow payments. There are two columns for these payments, one for years 1-7 of the loan, and one for years 8-30 of the loan. This section also includes a section for estimated taxes, insurance, and assessments, and whether those amounts are in escrow.
- “Costs at Closing:” At the bottom of the first page, the form requires disclosure of the amount of closing costs and the cash to close, with references to the second and third pages of the form for details.
- “Closing Cost Details:” The second page lists the components of the estimated closing costs, divided into “Loan Costs” and “Other Costs.” “Loan costs” include origination charges, services you cannot shop for (such as an appraisal fee) and services you can shop for (such as title insurance). “Other costs” include taxes and other government fees, prepaids (such as prepaid interest), the initial escrow payment at closing, and “other” (the sample form lists an owner’s title insurance policy as one of these charges.” The second page also includes a section “calculating cash to close” and the estimated cash needed to close.
- “Additional Information About this Loan:” This section, on the third page, third page provides “additional information” intended to help consumers “compare this loan to other loans.” This section also includes “other considerations” that may govern the loan. At the bottom of this page, the consumer is required to sign the form, but is advised that “you do not have to accept this loan because you have signed or received this form.”
The Closing Disclosure, which must be provided three business days before closing, is 5-pages long, and potentially maybe more confusing to consumers. The first page is largely the same as on the Loan Estimate, but the remaining pages are dramatically different. The “Closing Cost Details” section on the second page is broken into tabular format, contains up to 50 lines of information, and reads like a HUD-1 Settlement Statement. The third page includes a section for “Calculation Cash to Close” section, and a “summary of transactions” which again reads like a HUD-1, and contains up to 64 rows of information. The fourth page provides an extensive amount of “additional information” about the loan, such as assumption and demand features, late payments, whether the loan allows for negative amortization, and the escrow amount. The fifth page then contains the “loan calculations”—including the total of payments, finance charge, amount financed, APR, and Total Interest Payment (TIP)— and “Other disclosures,” such as that the consumer may not be able to refinance the loan. This page then lists the contact information for the lender, broker, real estate broker(s) and settlement agent, and concludes with a signature confirming the consumer’s receipt of the form.
While the forms may address some of the issues giving rise to the financial crisis—such as that the borrower may not be able to refinance—the forms may lead to other problems. For instance, the information previously displayed front-and-center on the TILA disclosure statement is now relegated to the fifth page of the Closing Statement. Thus, it is not obvious that consumers will more readily read and understand these forms than the TILA Disclosure Statement, Good Faith Estimate, and HUD-1.
Only time will tell, but the length of the forms, together with the immense length of the implementing rule and regulations, suggests that consumers may well continue to argue that they did not understand the terms of their loans at closing even after the CFPB mandates the use of these new forms on August 1, 2015.