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Know Before You Owe: Proposed updates to TILA-RESPA final rule

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Nearly a year ago, we issued the TILA-RESPA Integrated Disclosure Rule. Many of you know this work as Know Before You Owe and we’ve been talking about it for a while now.

Today, we’re issuing a proposal to modify and make technical amendments to this rule. The rule introduced new, easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for consumers. The new Loan Estimate and Closing Disclosure mortgage forms will replace the existing federal disclosures and help consumers understand their options, choose the deal that’s best for them, and avoid costly surprises at the closing table.

Proposed changes

There are two issues we’re addressing in today’s proposal.

First, we’re proposing to give creditors some extra time to provide consumers with revised Loan Estimates after a consumer locks a floating interest rate. Under the current rule, when consumers lock their interest rates, creditors are required to give them a revised Loan Estimate the same day. After considering feedback from stakeholders on this requirement, we think that such a short turnaround may be challenging for creditors that currently allow consumers to lock interest rates late in the day or after business hours. This could result in creditors only allowing consumers to lock interest rates during business hours or even early in the day (e.g., before noon). We’re proposing to give creditors until the next business day to provide the revised disclosures, which we believe should provide creditors with enough time to provide new disclosures without having to reduce flexibility that consumers may have today in locking their rates.

Second, we’re proposing a minor addition on the Loan Estimate form. Construction loans often take longer to settle than other loans, and the estimated charges can change when more than 60 days pass. Our proposal would create a space on the Loan Estimate form where creditors could include language informing consumers that they may receive a revised Loan Estimate for a construction loan that is expected to take more than 60 days to settle.

We determined that these issues are important and may significantly affect implementation planning and decisions.

Throughout the Know Before You Owe project, feedback has been an important part of the process. This step is no different. We welcome your comments on this proposal, so submit them by November 10, 2014.

Effective date

The effective date for the TILA-RESPA rule is still August 1, 2015. We’re proposing these changes now so that there’s plenty of time to consider these changes while implementation decisions are being made, and we do not think that the proposed changes will affect the industry’s ability to implement the rules on time.

Implementing the rules

As part of our work to support the implementation of our rules, we have regulatory implementation resources available including compliance guides, sample Loan Estimate and Closing Disclosure forms, and a calendar showing timing requirements based on a sample real estate transaction.

Updated on October 29, 2014 to include a link to submit official comments.

Take more control over the mortgage closing process with technology

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Closing on a mortgage can be one of the most exciting, and one of the most stressful times of your life. It comes after you’ve chosen your home, scoured the neighborhoods, evaluated the neighboring schools, and exchanged countless pieces of paperwork between your lender, realtor, home inspector, and others. You’ve made offers and finally had them accepted. You’ve been approved for a mortgage, and you have one more step to go before that home is yours: sign a mountain of papers at closing.

Recently, we asked you to tell us about pain points in the mortgage closing process. We also conducted in-depth interviews with consumers like you, realtors, loan officers, attorneys, and others involved at closing to better understand what goes on at the closing table. Through this research, we heard about four major pain points.

Four major pain points

Not enough time to review documents. You told us that you don’t get the paperwork until you arrive at the closing table, where there is pressure to rush through and sign your name over and over – with not enough time to ensure that you understand what you are signing.

Overwhelming stack of paperwork. You told us there are just too many pieces of paper in the stack, making the process of closing on a home daunting and overwhelming. The result is that many of you leave the closing table with a nagging feeling that something hidden in the stack might have long lasting effects on your financial well-being.

Documents are hard to understand. You told us that closing documents are full of legalese and technical jargon, and that you often have little help from others in the closing room to gain understanding.

Errors in the documents. You told us that errors in closing documents can often lead to delays. Even common and seemingly minor errors, such as a misspelled names or forgetting to include your spouse, require closing agents to redo the entire closing package.

Finally, we tested ideas for improvements to the closing process that help you play a more active role in the closing process. Before you sign on the dotted line, we want you to be able to fully understand the terms of your loan, have a chance to carefully review the documents you are signing, and feel empowered to ask the right questions and identify errors in the process.

Piloting a solution

From your comments and our research, it’s clear that the current closing process is not ideal. We identified potential solutions to some of the problems you identified. In particular, ideas for how technology can improve the closing process which we want to test over the coming months. Later this year, we plan to launch an e-closing pilot aimed at encouraging lenders to put you in the driver’s seat of your closing.

Some of our ideas include using technology to:

  • Help explain key terms, the closing process, and important documents
  • Give you more time to review the stack of documents
  • Help you find and fix errors in the documents prior to closing

If you want to learn more about the pilot, or are interested in participating, check out the guidelines and solicitation.

We’re excited about some of the promising technologies in the market today and we’ll keep you updated as we learn more about ways that the closing process can be improved. You can check out the report on the current state of closing for more about what we heard.

If you’re facing a specific problem with any part of the mortgage process, you can also submit a complaint online or by calling (855) 411-2372.

Know Before You Owe: Just one example of our approach to policy-making

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As the mortgage disclosure team said last week, we based Know Before You Owe on the idea that disclosure information is clearer when the people who will have to use those disclosures participate in designing them. We got feedback from many sources in many ways:

  • In-person testing of the forms in cities across the country from consumers and from people in the mortgage industry, both before proposing the new disclosures and after;
  • Online publication of various iterations of prototypes of the forms as we tested them and getting more than 27,000 clicks and comments to tell us what worked (and what didn’t);
  • Quantitative validation study with about 850 consumers of how well consumers understand the new disclosures compared to the ones currently in use (we’ll talk more about the results of that study in the days to come); and
  • Ongoing dialogue with industry groups, financial institutions, consumer advocates, policymakers from across government, and designers throughout the design process.

This testing and iteration process occurred alongside legally required feedback such as a Small Business Review Panel before we issued the proposed rule, and the public comment period for the proposed rule.

We started this prototyping and research even before the Bureau began regulating consumer financial products and services. In the process, we established a pattern of public inclusion in what we create. We have since taken on additional projects that rely on this pattern to succeed. In each case, we believe it has made us better at our work and will continue to do so.

Consumer tools

In April 2012, we introduced a beta version of a tool to help students compare the costs of college. Based on the feedback we got, we made improvements and re-released it along with a number of other tools to help students understand paying for college.

Now we’re working on similar tools to help people interested in owning a home. In each case, we continue to take feedback. We don’t believe that products to help consumers understand their options are ever complete. When we make new consumer tools, we commit to analyzing how people use them. The tools should change as we understand more about what’s useful or necessary, and what’s not.

Making information more accessible

We maintain a regularly updated public database of consumer complaints we receive. We also maintain an API that lets people build on top of that data.

A few months ago, we created a new platform to publish home mortgage data. Not every good idea for using consumer financial market data is ours; these platforms give the public access to data about their own experiences.

Last month, we launched a prototype tool to make regulations easier to read, understand, and use. After a series of user interviews and a number of prototype usability tests, we’ve piloted eRegulations with one regulation. Before making any decisions on what to do with it next, we’re asking people who need to understand changes to Regulation E to use it and let us know how it works for them.

Prototyping better disclosures

The prototyping efforts of Know Before You Owe laid the groundwork for another initiative. Federal consumer finance regulations should protect consumers, not hinder innovations that help them. Through Project Catalyst, we work with innovators to do just that. Someone who spots a way to make regulations more innovation-friendly can work with us to design experiments. Someone who thinks there’s a way to make disclosures clearer can work with us to start a trial that tests how well their idea works.

Open source software

Source code written by our staff is public domain by default. Anyone can use and build on it as long as it meets a few standards. And we are committed to publishing it in an online source code community. CFPB Open Tech gives the public easy access to free, open source software they can use as the basis for their own new tools and approaches. In turn, we get to review ideas from other developers and decide whether to use them to make our software better.

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In short, we value building things with public participation. It comes back to the same basic point: if you know people are going to have to use something, you should work with them to figure out what makes it useful. It’s an idea we have espoused since the start of Know Before You Owe, one we’re going to continue to build on.

Know Before You Owe: preparing to finalize the new mortgage disclosure forms

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Two and a half years ago, we began a line of work we call Know Before You Owe. The work that we did as part of that project helped lead us to the TILA-RESPA final rule we issued Wednesday. Among other things, that rule requires new mortgage disclosures: a Loan Estimate the consumer gets when applying for a mortgage, and a Closing Disclosure when the consumer is ready to close on the mortgage. Today we’re looking back at the project that helped get us here.

What is Know Before You Owe?

When you buy a financial product or service, you should understand the terms you’re offered before you sign on the dotted line. You should be able to compare different products effectively and make the right choices for yourself and your family. And the information you use to make those decisions should be clear and easy to understand.

This information is usually presented in writing, in forms like disclosures, contracts, and offer letters. We believe that the best way to make sure this information is clear is for the people who actually have to use the information to help us design them. So that’s exactly what we asked people to do. We call this project Know Before You Owe.

How does it apply to mortgages?

We started Know Before You Owe in May 2011 with mortgage disclosures. In the Dodd-Frank Act, Congress directed us to combine the existing disclosures you get when you apply for and close on a mortgage: the Truth in Lending disclosures, the Good Faith Estimate, and the HUD-1 Settlement Statement. These disclosures contain some of the basic facts about home loans, and they should help you pick the right mortgage product for you. But they have overlapping information and complicated terms, and they can be just plain difficult to understand.

The idea is to create a single, simpler set of forms so that when you shop for a mortgage, and then again when you close on one, you can understand the basic information you need to pick the right mortgage loan for you.

Over the course of about a year, we qualitatively tested the forms with consumers, lenders, and settlement agents across the country to see how people would use the forms. We saw how they understood different types of mortgages, different terms, and different versions of the forms. We supplemented this this qualitative testing by posting the forms here on consumerfinance.gov and asking people to weigh in. Over the course of the project, we received more than 27,000 comments that helped us improve the disclosures we proposed.

What’s the final rule all about?

In July of last year, we proposed the rule that would require the new forms. As expected, we got a lot more comments: more than 2,800 of them. Since the proposal, we’ve been reviewing these comments to improve the rule. We’ve also conducted a quantitative validation study with about 850 consumers in 20 locations across the country. The study compared our new forms against the existing forms. We conducted additional qualitative testing. And we reviewed what information you told us we should add to the rule to make compliance easier.

The last big milestone in getting to a final rule was … issuing the rule, which we did last Thursday. The rule we submitted to the Federal Register had a lot of information and instruction about the new disclosures: what needs to be in them; what kinds of loans and which lenders need to use them; when to start using the new forms; and more. Along with the new rule, the notice contains information about the testing, analysis, and other work we did to develop the rule. And we posted a number of other things to help people understand the rule: what it means for consumers and for industry, additional testing results, and more.

A final rule that makes mortgage disclosure better for consumers

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Today, we’re issuing the TILA-RESPA final rule. This rule improves the way consumers receive information about mortgage loans, both when they apply and when they’re getting ready to close. Alongside the rule, we’re publishing information to help industry understand what the requirements are, such as how to fill out the disclosure forms. Helping with that understanding will be an ongoing process. We’re also publishing information about the project that got us here and what the new rule means for consumers.

We want it to be easier for consumers to shop effectively for mortgages and to make the decisions that work for them. We want consumers who are confident in the information they receive, the lenders they work with, and their ability to make good comparisons. This rule is a key part of that effort, so we’ve spent a lot of time testing the new disclosures with consumers who will them as well as industry who will have to explain them to consumers. The results of that testing show that our new disclosures make information clearer and easier to use.

What does the rule do?

The final rule contains new rules and forms for two disclosure forms consumers receive in the process of getting a mortgage loan: the Loan Estimate, which comes three business days after application, and the Closing Disclosure, which comes three business days before closing on the loan. These disclosures are required by the Truth in Lending Act and the Real Estate Settlement Procedures Act. The new forms integrate existing disclosures and implement some new disclosure requirements from the Dodd-Frank Act.

The rule also offers some more protections for consumers. For example, consumers must receive their Closing Disclosure three business days before closing on the loan so they have time to review it. The final rule also limits the circumstances in which consumers will have to pay more for settlement services than the estimate they received.

These disclosures and requirements will be effective August 1, 2015.

What’s new about the disclosures?

For most homebuyers, a home is the biggest purchase they’ll ever make. It’s also the most complicated financially, with a lot of paperwork to review and understand. The new forms simplify and clarify a lot of information. Essentially, our forms work to allow consumers to compare loans and make better informed decisions.

The new forms are shorter than the forms under current law. Our Loan Estimate is three pages long; the existing federal disclosures it replaces run at least seven pages. Our Closing Disclosure is five pages long and combines five pages of old forms, plus new disclosures required by the Dodd-Frank Act. This is only some of the information consumers get; lenders, investors, other agencies, and states require other documents. We are working with these other parties to figure out how to reduce the paperwork burden further.

But length isn’t the only factor. The documents need to be easy to understand and use. If we reduced page count but increased confusion, we did the wrong thing. We adopted a user-centered design process in creating these forms that made us confident we could clarify as we streamlined. It turns out we were right: the public made us better at our work.

How do we know they work better?

After we proposed the rule that would have required the new forms, we worked with Kleimann Communication Group to conduct additional qualitative testing as well as a quantitative validation study to measure how well the forms work. Before beginning the study, based on the comments we received on that proposal, we made a few changes to make the forms even better for consumers. These modified versions were the ones tested in the study. Today, we’ve published a report on the study, including its methodology, but what wowed us, and what we want to share here, is the results, which are striking.

We asked participants to answer questions on a written test about a sample mortgage. Those who used our new forms provided more correct answers than those who reviewed the current forms, an improvement of 28.8 percent. The margin of error was plus or minus 4.7 percentage points. Put another way, our new forms performed significantly better than the current forms.

These results are consistent when we break down the questions by different variables in the study, such as identifying numbers from one loan or comparing two loans, experienced or inexperienced mortgage consumers, reviewing a fixed rate or an interest-only adjustable rate loan, or focusing on interest rates or on payments. Which is to say: we are confident we didn’t end up with proposed disclosures that work well for one kind of mortgage loan experience but are confusing for others.

The testing showed that it’s not just that people could understand the new disclosures; they could talk about them, too. People who used the new forms could explain why they made choices they did and offered more comments about their choices than people who used the existing forms. This suggests the new forms may help people articulate their thoughts more clearly. That could mean better discussions with spouses, financial advisers, realtors, and others who help consumers in the process. It may mean more than just better financial results; it may mean a better shopping experience.

What comes next

The next step on the TILA-RESPA rule is developing an implementation support effort. We’re already working on this. Look for information soon that helps industry understand how to comply with the new rules, what they need to do to prepare, and more.

In January, the Title XIV rules become effective. Those rules codified many lending and servicing practices that help consumers and prohibited many practices that tend to get them in trouble. We’re also beginning to develop tools focused on consumers that can help them shop for their homes.

These three areas of work – requiring good information, requiring good practices, and offering useful tools – create the foundation for a better homebuying experience, one in which consumers understand prices and risks and have the clarity they need to make the best decisions for themselves and their families.