The Consumer Financial Protection Bureau (CFPB) released a new rule on November 20, 2013, requiring simpler and more streamlined “Know Before You Owe” mortgage disclosure forms. The streamlined forms are designed to facilitate comparison shopping by consumers, to provide a more informed understanding of the fees and monthly payments associated with a potential loan, and to help buyers avoid “bait and switch” tactics by lenders. The CFPB combined multiple forms into two simpler forms – the first of which is a loan estimate provided three days after a buyer applies for a mortgage loan. The second is a closing disclosure received three days prior to the closing on the loan.
The first form, “Loan Estimate,” combines statements required by the Truth in Lending Act (TILA) and the Good Faith Estimate. The form details key loan terms and closing costs. Lenders must provide the estimate within three business days after a potential borrower submits a loan application.
The second, “Closing Disclosure,” combines another TILA form and the HUD-1 settlement statement into one comprehensive accounting of the loan transaction, which lenders must provide three business days prior to the closing date. The closing disclosure is intended to provide borrowers with increased time to review the final costs for a loan prior to the typically frenzied closing process. Ideally, the closing disclosure will provide consumers with more time to ask questions about changes in the loan information and to confirm that the final loan terms coincide with the terms that they intended to agree to at the time of the initial loan application. Lenders need only issue amended closing disclosures if there are significant changes in the annual percentage rate associated with a loan, changes to the loan product, or if a prepayment penalty term is added to the loan.
The new rule will become effective on August 1, 2015, and the CFPB has already begun working toward effective implementation.
The issuance of new streamlined forms demonstrates the CFPB’s commitment to facilitating borrower awareness and ownership of the loan application and closing process. Lenders should actively be reviewing their compliance policies and procedures as well as their databases of forms to ensure compliance with the applicable law. Vigilant monitoring of compliance is especially important because many changes are ongoing and will continue to go into effect throughout the next year.