Soon you will see new “loan estimate” and “closing disclosure” forms if you are applying for a mortgage, under a proposal to provide clearer costs and risks associated with home loans.
The new forms benefit consumers by using plain language and a format that will help them understand their loans, according to the Consumer Financial Protection Bureau (CFPB).
The CFPB’s proposal took into consideration 10 rounds of testing with consumers and industry sources, along with feedback from the public on several prototype forms over the past 18 months.
Public feedback has included tens of thousands of comments.
Consumers currently receive two different, but overlapping, federal disclosure forms after applying for a mortgage that are supposed to spell out the terms and costs of the loan. These forms are required by the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).
“The differences in these two forms can be confusing to consumers and industry,” the CFPB said.
At the direction of Congress through the Dodd-Frank financial reform law enacted two years ago, the CFPB is combining the two forms to create one document.
The CFPB’s new “Loan Estimate” and “Closing Disclosure” also benefit lenders by cutting down on redundancy.
Here are some of the key improvements in the proposed forms, according to the CFPB:
- Simpler than the old forms. Consumers can understand and compare different mortgages more effectively, and examine their estimated and final terms and costs more easily, helping them make the right decisions for themselves and their families.
- Highlight information consumers need. Interest rates, monthly payments, the loan amount, and closing costs are all right there on the first page of the CFPB proposed form. Also, the first page explains how the interest rates, payments, and loan amount might change over the life of the loan, including the highest they can go. In addition, the forms offer more information about taxes, insurance, and other property costs so consumers can better understand the total cost.
- Easier to look out for risks. The forms provide clear warnings about features some consumers may want to avoid, such as prepayment penalties and an increase in the loan balance (negative amortization).
- In time, it is expected that new guidelines will also be published for other types of property-based loans such as bridging loans for example. In case you were not aware, a bridging loan is a secured loan that can be used to fill the gap between making a purchase and other funds becoming available. Depending on the size of the loan required, bridging loan rates can vary drastically.
The proposal by the CFPB also contains provisions to make estimates more reliable.
Lenders must give the loan estimate to consumers within three business days of applying for a loan and consumers must receive the closing disclosure at least three business days before closing on a loan.
This will allow consumers to decide whether to go ahead with the loan and whether they are getting what they expected.