December 3, 2023

DealBook: Consumer Bureau Plans New Mortgage Form

The mountains of paperwork are one of the few certainties of home buying.

Now regulators are aiming to cut back on some mortgage documents, as the new federal consumer watchdog announced plans on Wednesday to revamp crucial forms that have long confused would-be home buyers.

During the mortgage bubble, many consumers signed up for loans they could not afford – a problem that nearly caused the collapse of the financial system. Consumer advocates have blamed lenders for doling out credit on a whim and regulators for creating mortgage disclosure documents that failed to alert consumers about risky lending.

“The current forms can be complicated and difficult for consumers to use,” Elizabeth Warren, the Obama administration official who is setting up the Consumer Financial Protection Bureau, said in a statement, adding that the forms are also “redundant and can be costly for lenders to fill out.”

The consumer agency unveiled on Wednesday two prototypes for a “single, simpler” form that will replace the Truth in Lending Act mortgage disclosure and the Real Estate Settlement Procedures Act’s Good Faith Estimate, Ms. Warren said.

The prototypes are seen as a mixed bag for the mortgage industry. Lenders have long complained that the existing forms are overly complicated and costly, although they also are weary of major changes to their business.

The Financial Services Roundtable, a major financial industry trade group, issued a statement on Wednesday praising the prototypes as a “positive step forward for both consumers and financial institutions.”

The new mortgage form would make several tweaks to the Truth in Lending Act document and the Good Faith Estimate, which are two pages and three pages, respectively.

The prototypes combine the existing forms into a two-page document that, according to Ms. Warren, makes the costs and risks of the loan clear. The documents, for instance, highlight “key loan terms,” like the projected monthly loan payment, and underscore “cautions” about risky aspects of the loan, including prepayment penalties and balloon payments.

“This is about empowering consumers,” Ms. Warren said on a conference call with reporters. “With a clear, simple form, consumers will be in a better position to answer two basic questions: Can I afford this mortgage, and can I get a better deal somewhere else?”

Still, it could be more than a year before consumers will be able use the new form. The consumer bureau said it would first subject the two prototypes to “testing” over the next several months. The testing will include one-on-one interviews with consumers, lenders, and brokers in six cities, including Chicago and Los Angeles.

The bureau will then put the finishing touches on a single document, which may become a hybrid of the two prototypes.

Under the Dodd-Frank financial overhaul law, the consumer bureau must formally propose the new form by July 2012, although bureau officials said the process might continue into the fall of that year.

“We’re going to keep testing this thing,” Ms. Warren said.

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