In its first major move the Consumer Financial Protection Bureau released two prototypes of shorter and easier-to-understand disclosure forms that lenders must give home buyers when they apply for a mortgage.
The overall goal of the agency is to help consumers better comprehend the terms of the loans and compare them with mortgages available from other banks.
The forms will have simpler language and use high-lighted terms, arrows and "yes" or "no" graphics to provide key details about a loan, which include whether the mortgage terms can change, projected monthly payments for different years and a new piece of information - how much of the loan would be paid off in 5 years.
Some mortgage industry leaders have supported the simplification of disclosures but feel the changes would cost too much and cause legal liabilities.
The new form would replace two slightly longer mortgage disclosures that many home buyers complain are duplicative and difficult to understand.
The changes are due in great part because of regulatory failures leading up to the subprime mortgage meltdown, the consumer bureau is making simplified mortgage disclosures a priority as it prepares to start operations in July.
Changing the disclosure forms is the first of several ways the agency will become a key player in mortgage regulation. For instance, it also will set new standards for how companies service home loans.
The financial reform law enacted last year created the consumer bureau and directed it to develop a "single, integrated disclosure for mortgage loan transactions" by July 2012.
Lenders are required to provide two forms to a consumer within three days after he or she applies for a mortgage. The forms outline the loan's interest rate, initial monthly payment and other features.
One form is a two-page Truth-in-Lending-Act mortgage disclosure statement. The other is a 3 page "Good Faith Estimate (GFE)" required by the Real Estate Settlement Procedures Act.
In a poll last fall by Consumer Reports magazine, 84% of respondents who had applied for a loan or credit card recently said they had some difficulty understanding the financial disclosures.
The consumer bureau released the forms as part of its "Know Before You Owe" project to get feedback from the public, consumer groups and the mortgage industry.
Over the next four months, the agency will conduct interviews about the forms with consumers and mortgage industry officials in six cities - Los Angeles, Chicago, Albuquerque, Baltimore, Birmingham, Ala., and Springfield, Mass.
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