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Making mortgages easier to understand

By Polyana da Costa ·
Wednesday, November 20, 2013
Posted: 6 pm ET

The federal government has unveiled the forms that are supposed to simplify the mortgage process and make it easier for consumers to understand the loans they are getting.

The two forms will replace a set of complex paperwork that consumers receive: first, when they apply for a mortgage and then, days before they close on the loan. The Consumer Financial Protection Bureau had been working on the new disclosure forms for about two years. Lenders will be required to use the new forms starting in August 2015.

What will change when you apply for a loan

Borrowers applying for a mortgage loan after the forms go into effect will get a loan estimate form, instead of the usual good faith estimate, or GFE form, that they currently get. The new form spells out in simple terms on the first page:

  • Loan amount.
  • Interest rate.
  • Monthly payments for the first seven years.
  • Payments after that.

The form will include details on how much the borrower should expect to pay in escrow, closing costs and mortgage insurance.

What will change before you close on the loan

Buyers will get a closing disclosure form before closing to easily compare the estimated numbers with the final figures. The form will replace the HUD-1 form and the Truth in Lending Act, or TILA, statement that borrowers get today.

Why the changes will help you make better decisions

Borrowers currently face challenges when trying to compare the GFE form with the document containing the final numbers before closing (the HUD-1) because the two forms look different and use different terminology.

The CFPB wants to make that comparison easier by making the loan estimate and the closing disclosure form almost identical, using the same terminology in both. The forms will also make it easier for consumers to compare quotes from lenders when shopping around, CFPB's director Richard Cordray says.

"They will be able to see, for example, who is providing better rates and cheaper application fees and who is quoting better pricing on insurance costs," Cordray said during a field hearing in Boston, where the new forms were announced.

The forms also help consumers better understand the risk level of the loans they are getting, says Patricia McCoy, Insurance Law Center director and Connecticut Mutual Professor of Law at the University of Connecticut School of Law. She was a panelist at the hearing.

Better -- but not perfect

But more could be done with the forms and the disclosure rules to help borrowers compare loans, she and other consumer advocates say.

A flaw on the forms is that the annual percentage rate, or APR -- a key measure of the total cost of the loan that factors in the interest rate and loan fees – isn't prominently displayed on the first page of the loan estimate form, consumer advocates say.

"The final version of the CFPB’s form buries this key disclosure on page 3, making it harder for consumers to find and less likely that most consumers will recognize its importance," the National Consumer Law Center states. "Instead, the first page of the proposed form highlights the amount of cash the borrower will need to bring to closing -- a useful fact, surely, but rarely the key variable in pricing between two loans."

What do you think of the new forms? Are they easier to understand?

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