On November 20, 2013, the CFPB issued the final version of its "Know Before You Owe" Rule and new mortgage disclosure forms. As everyone knows by now, these new forms will take the place of the existing federal disclosures under the Truth In Lending Act and the Real Estate Settlement Procedures Act which, although familiar to compliance officers, were in a number of ways confusing to borrowers who have much less experience with residential mortgage transactions.

This new final rule requires the use of a new Loan Estimate form and a new Closing Disclosure form (samples attached), dictates the timing for furnishing these forms, and limits how loan terms can change from the original loan estimate to the final closed loan.

The Loan Estimate. This form must be provided within three business days after the consumer submits an application. It takes the place of the old early Truth In Lending Statement and the old Good Faith Estimate. The Loan Estimate provides a summary of the loan's terms and an estimate of costs. The CFPB envisions that this disclosure will be used to compare costs and features of different offers.

The Closing Disclosure. This form will be provided three business day before closing and will take the place of the final Truth In Lending statement and the HUD-I settlement statement.

The CFPB conducted more than two years of extensive research and testing of the disclosure forms. The Bureau received feedback from this testing and public comments on the proposed rule. The new forms are hoped to improve both consumer understanding and comparison shopping, while avoiding costly surprises to a consumer at the loan closing.

Improved Consumer Understanding. The CFPB's study confirmed the benefits of the new forms. Consumers of all levels of experience were able to understand the new forms better than the current forms. Specifically, the forms helped consumers better understand the following items of information:

  • Risk Factors: Consumers can more easily identify risky loan features. In addition, lenders will have to tell homebuyers about prepayment penalties, larger than usual periodic payments, and complicated loan structures.
  • Short-Term and Long-Term Costs: Both the Loan Estimate and the Closing Disclosure more easily explain the total costs of the loan. There is a breakdown of the loan amount, the principal and interest payment and how it could change, and closing costs.
  • Monthly Payments: The CFPB forms state what a consumer's monthly payment and interest payments will be. If the loan has an adjustable rate feature, the forms state the projected minimum and maximum payments over the life of the loan.

Better Comparison Shopping. In testing, the new forms performed better than the current forms when it comes to comparing offers, by a significant percentage. The new forms enable better:

  • Comparison of Competing Loan Offers. The new forms breakdown the costs of the loan, such as interest rate, mortgage insurance costs and closing costs. As a result, consumers are better able to distinguish between two different loan offers.
  • Shopping for Closing Costs. Closing costs, including origination fees, appraisal fees, title insurance, taxes, settlement services, inspections, and homeowners insurance must be disclosed. The new forms plainly outline what closing services a consumer will need and which ones they can shop for.

Avoiding Costly Surprises. The CFPB's rules implement several new consumer protections:

  • Comparisons of Estimated and Final Terms. By making the Loan Estimate and Closing Disclosure very similar in format, consumers are better able to compare the initial estimate with the final terms of the loan.
  • More Time to Consider Choices. By providing the Closing Disclosure three days before closing, consumers can review their final loan terms and costs in an unpressured environment. This also gives consumers time to ask questions and negotiate over changes that may have occurred.
  • Limits on Closing Cost Increases. The final Rule restricts circumstances in which consumers can be required to pay more for settlement services than the amount stated on the Loan Estimate. Lenders cannot impose new or higher fees on the final loan unless there is a legitimate reason.

The effective date for the new Rule is August 1, 2015, which allows for a significant amount of time to familiarize ourselves and prepare. We will not attempt to take this issue on at the February Quarterly Meeting at the suggestion of the Steering Committee, but it is certain to be a focus of attention at future meetings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.