Richard Cordray, the Consumer Financial Protection Bureau (CFPB) Director, has made it clear that one of his main goals is to restore trust in the mortgage market, which was hurt after the burst of the housing bubble during the 2008 economic recession. One important step toward this goal is creating a simplified mortgage application form and making mortgage procedures and fees more transparent. Reforming the mortgage market is critical to the clean up from the 2008 recession and even before then, when the housing bubble began to burst in 2006 due to subprime lending.
Since the housing crisis began, nearly 8 million Americans have faced foreclosure. It is now more important than ever to provide consumers with adequate information so that they can get a mortgage they can afford and understand the fees outlined in their loan terms. The subprime mortgage crisis was devastating to loan applicants who were not aware of the fees associated with their mortgages or who were told they were eligible for mortgages that exceeded what they could actually afford.
The CFPB’s “Know Before You Owe” project comes two-fold. The first simplifies loan estimates, and the second makes the closing disclosure process more transparent. The CFPB’s proposed rules would require lenders to provide mortgage applicants with an outline of loan terms within three days of application. These terms would include information such as how much interest the applicant would pay and how the interest rate could change over time.
Not surprisingly, in recent testimony before Congress, representatives of the Mortgage Bankers Association said they favored a slow approach to reform and oppose the requirement of a settlement disclosure to be delivered three days before closing. Although the association agrees that faulty disclosures led homeowners to carry loans they were unable to afford, association members have apprehensions about other sections of the proposed rules. Some industry members have also expressed concern that the time frame for comments on the proposed rules is too short for the over 1,000-page proposal.
In the meantime, the CFPB is calling upon advocates, industry members, and the public for comments on the proposed rules regarding shopping for a mortgage, closing on a mortgage, and paying off a mortgage. Advocates and industry members agree that it is important to protect consumers and energize the housing market again. Additionally, the CFPB will be finalizing the “ability to repay” rule, which implements another Dodd‐Frank Act provision that requires lenders to verify income information to prevent mortgages that are destined to fail quickly.
The rules regarding loan estimates and closing disclosures are open to public comment until November 6, and are available on the CFPB’s website. The CFPB expects to finalize them in January 2013.