The Consumer Financial Protection Bureau (CFPB) has begun testing
two prototype mortgage disclosure forms that the newly created
agency hopes will help people better understand their risks
when applying for home loans.
A home loan is the biggest financial commitment most Americans
will make in a lifetime. Getting stuck in the wrong home
loan can cost tens of thousands of dollars over the life of
the loan and sometimes it can even cost your family its home.
The housing crisis that helped plunge the nation into a recession
revealed a troubling thing about many home-loan borrowers:
Many did not know how much they would owed or the risks involved
with their investment. Borrowers were sitting in front of a
huge stack of papers signing away. Many did NOT understand
even the type of loan they were getting and were SHOCKED to
discover that it wasn't a conventional mortgage loan with a
fixed interest rate. Instead, they were given exotic mortgages
that they did NOT understand because these loans weren't clear
and they were lured in with low teaser rate that would reset
and push their monthly payments beyond their means.
I have counselled many borrowers in these type of situations.
The rates that they agreed upon suddenly escalate to 60 or
70 percent of their net monthly income.
Federal law requires that mortgage-loan applicants receive
two critical documents: the two-page federal Truth-in-Lending
Act Mortgage Disclosure form and the three-page Real Estate
Settlement Procedures Act Good Faith Estimate (RESPA). Both
provide borrowers fundamental information about their loans.
These two documents are supposed to help prospective home buyers
understand how much they will pay. However, these forms are
complicated and difficult to understand.
Congress acted to require simpler mortgage disclosure forms
and last week the CFPB announced the "KNOW BEFORE YOU OWE"
project to combine the two disclosure forms into a double-sided
document that should make the costs of a home loan much clearer.
To view how the new forms might look, go to consumerfinance.gov
then "Truth in Lending form" and the "Good Faith Estimate."
These two prototypes contain calculators that will help the
investor understand just how much house he/she can afford.
Both prototypes are excellent teaching tools and should go far
in educating the investors.
