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Know Before You Owe: And now for something completely different…

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In the first three rounds of Know Before You Owe, we asked you to compare different draft versions of a simplified mortgage disclosure form. Round 1 was about designs for the front-page, the “shopping sheet.” Round 2 was about the second page, which presents the closing costs. Round 3 offered different ways to highlight and clarify some of the more confusing sections.

This time, we’re doing something slightly different.

We’re asking you to compare two different types of loan products using the same version of the form. If you’re a consumer, which product would you choose? If your work puts you in a position to advise potential borrowers, which would you recommend?

Make your choice now.

We’re shifting gears for a simple reason: Comparing two versions of a form is useful, but in the real world, consumers should be able to use disclosures to compare different loan offers, not different forms. We want to make sure the disclosure actually helps consumers understand features of competing loan products, from the overall loan amount to estimates of taxes and insurance costs.

As you compare the forms, think about what information you were able to use to make your decision, and what additional information you might need. What questions would you have after looking at these two loans using this version of the form?

This is not a final version of the form. For the next week, we will be testing two forms in the Springfield, MA, area. We also are using this in-person research to learn about how other disclosure items required under the Truth in Lending Act are working for consumers. For example, how clear are statements about reading your contract? Do people understand whether loans can be assumed by a subsequent purchaser? We have developed a separate page to test these concepts, and we will be using it with each of the two forms.

As always, you will be able to tell us if you think key information is missing, or if you think some sections would be more effective if we presented them differently. For instance, would the “Comparisons” be more helpful to consumers if we put them somewhere else?

We began Know Before You Owe in May so the people who will use these forms could help us make them better. Understanding how you will use them to make choices is an essential part of that.

Help us improve disclosure. Weigh in today.

  • Pat Darrall

    This form is pretty clear.  In the Security Interest area, separate the two sentences so the second one will have a little more impact.  
    Verify Receipt area:  This should say something like:”Your signature here only indicates  your receipt of this document. ”

  • Bridget

    It’s getting closer, but I still don’t think borrowers care about the APR and the TIP.  Nor do I think it likely that they will use these forms to “shop” for loans.  

    One other suggestion would be to change the language from Lender Attorney to Settlement Agent as it is more widely used across the country.  

  • Anonymous

    The Jasmine is probably the better loan but the primary information needed to make a good recommendation is not available here.   I do however have some comments.  These disclosure formats are seriously lacking and are confusing and not very informative to the average consumer.  I dare say they are not even an improvement over what we have today.  Your Nandina example shows how some loan originators skew numbers for Insurance, taxes and escrows to make their original offer look good to an unedcuated consumer but unfortunately far too many fall for it only to get slammed at closing.  This is a major shortfall of disclosure rules.  Lenders should be required to give accurate disclosure of escrow deposits for taxes and insurance.   

    I still believe the GFE and TIL should not be combined into a single form because there is too much important information and combining the two then adding in parts of the ARM disclosure makes these disclosures very confusing for the average consumer.   The cash to close figure is meaningless without a payoff figure for the current loan and this form doesn’t even have a line for it.   You can’t accurately disclose a refinance without an estimated payoff for the current mortgage. 

    The disclosure format you seem to be hung up on is terrible and in my opinion worse than what we have today which is worse than what we had 4 years ago.  The GFE needs to be one page.  The TIL needs to be separate and the ARM Disclosure, if needed, should stand alone and include a year by year worse case example in all cases.  Most of this format is wasted on disclosure of ARM terms and the majority of loans originated are fixed rate loans.  One change I would make to the TIL is that you should have 2 APR figures, a fully indexed example based on today’s market and a worse case example APR.  

  • GM

    More of the same.  How much money is being wasted “testing” new forms over and over.  How many government employees does it take to create a simple form that few people will truly look at or understand.  Consumers do NOT choose a loan based on these disclosures.  They choose a loan/lender based on a relationship or referral to someone or a rate advertisement.  Go back to the old forms, quit wasting our money and actually just punish bad lenders who do bad things. 

  • Guest

    While these forms are being presented for comment on the loan terms, the entire format of the form has changed from the last proposed forms. I think this form is confusing and does not meet the intent. I would suggest going back to the last proposal for the format.

  • Anonymous

    Your disclosure form states the following about federal income tax deduction of home mortgage interest: 

    “Tax Deductions: If you borrow more than your home is worth, you may not be able to deduct interest on the amount above the home’s fair market value from your federal income tax. Consult a tax advisor to find out if you may deduct the interest you pay.”
     
     
    The paragraph overemphasizes one aspect of non-deductibility and even then it is misleading.  A better way to word such advice with fewer characters and spaces is as follows:
     
    “Tax Deductions:  Even when paid, not all home mortgage interest may be deductible on your federal income tax return.  Various tax rules apply.  To help you determine the deductible portion, consult a competent and knowledgeable income tax advisor.”
     
     
    Another way to say the same thing keeping the very good example you selected is as follows: 
     
    “Tax Deductions:  Even when paid, not all home mortgage interest may be deductible on your federal income tax return.  Various tax rules apply.   For example, one rule states that if you borrow more than your home is worth, you cannot deduct as part of the home mortgage interest deduction, the interest related to the portion of the debt exceeding the home’s fair market value.  To help you determine the deductible portion, consult a competent and knowledgeable income tax advisor.”

    (Comments in this color and brightness are hard to read. A dark maroon or burgundy would be better.)

  • Guest

    There a WAY too many numbers on these forms.  I find the TIP especially confusing – these are adjustable rate loans – how can the statement be made “you WILL pay?” As these loans are adjustable no one knows what the true amount of total interest that WILL be paid.  These forms may make bureaucrats and consumer advocates feel good but the average consumer is going to take one look at these forms and immediately be overloaded with too much information based on too many “what ifs.”  If you want to help consumers scrap this form and boil all the fees and expenses down to one number in the APR.

  • Netmar901

    Most consumers want to know three things:  How much their monthly payment is, the rate on their note, and what day their payment is due.  Very few consumers even understand why their APR is higher than the interest rate on their note, no matter how many times you explain it to them.  Throwing in the TIP is only going to confuse them even more.  Further, most consumers don’t use these “shopping tools” as it is because they are too confusing to them, and by the time the lender is able to crunch the numbers properly, the consumer has already made their decision to go with that lender. No matter how many  documents we are required to produce, if the consumers aren’t going to read them or do not understand them, we really haven’t solved anything except making the costs increase.

  • VanbytheRiver

    Both are very confusing. Some specifics: TIP will confuse consumers. Disclosure of the estimated amount of total interest in dollars over the term of the loan is much more meaningful. Any disclosure numbers for an ARM loan will necessarily be estimates, as it is impossible to predict how the rate may adjust in the future. That fact should be very clearly stated. ARM programs can vary so widely that it is counterproductive to try and explain the program details on this disclosure. Current regulations require a generic ARM program description to be provided. That requirement should continue and the transaction-specific disclosure form should refer the consumer to that detailed ARM explanation document for details. I hate to imagine how much money is being wasted by CFPB in this quest to reinvent the wheel. Asking consumers which forms they like best presupposes that they actually understand the details of the transaction. Chances are they do not, so the process is basically the blind leading the blind. The pre-2010 RESPA and TILA disclosures are far more meaningful. Some gentle tweaking around the edges along with vigorous, firm enforcement of those laws and regulations is the right approach. Inadequate enforcement is the real problem. Quit wasting money on massive disclosure overhauls and devote those resources to enforcement. It is a cop-out to waste resources on the next new disclosure that regulators and politicians can thump their chest about while existing laws and disclosures are not being adequately enforced. 

  • Anonpost

    I like the idea of combining the GFE and the TIL into one meaningful form, but I think if we drown the consumer with information, they aren’t going to understand it any more than they understand the forms we currently give them, nor are they going to spend any more time reading them than they do now.  Although at first glance these forms look simple, I don’t think the TIP is meaningful because it will overwhelm the consumer.  How is that going to help them shop the loan?

    What’s the point of telling them what they will pay in principal and interest in 5 years if the loan is for 30 years?  How is that going to help them shop the loan?  Will the consumer really care about the 5 year mark if the loan is for 30 years?

    Would we also be required to disclose the TIP when quoting rates to consumers inquiring about our rates, like we do the APR?  Would we also be required to disclose the TIP along with the APR on advertisements?

  • Tim J.

    As a lender, I feel that asking which loan we would recommend to a potential consumer is beyond the realm of our responsibilities.  The lender should provide the information for the consumer to make their own choice and not for us to make a choice for them.   Therefore, I feel it’s not for us as a lender to decide what loan the consumer should choose and don’t plan to vote this time around. 
     
    As to the form itself, I agree with many of the other posts that the TIP will just confuse the consumer and
    should be deleted.    The Key Terms section is what the consumer really wants to know and I think is on the right track.  The Projected Payments section needs to be tweaked to apply to the actual program.  What about Fixed Rates and Balloons where payments don’t change for a substantial period of time?  It’s senseless to repeat the same amount in the various years column.  In the Comparisons section, why is 5 years listed?  Wouldn’t it be more useful to show total payments made over 3 years on a 3/1 ARM or over 15
     years on a 15 year balloon or 15 years on a 15 year fixed rate?  Explain how the APR is arrived at in your explanation.  Consumers don’t understand APR and need a simple explanation.  Under “Calculating Your
     Estimated Cash to Close”, I think the services you can shop for need to have itemized amounts.  Finally, the ARM Information at the bottom of the form should not include the minimum interest rate.  It is not a critical issue and makes it difficult for banks like us who have no minimum for our ARM payments.  I understand that the maximum rate is important.  Also, to the consumer, the name of the Index really means nothing.  Instead an explanation of how the index works should be incorporated with an inserted number for the margin within a short paragraph explanation.

    I think there is considerable work that needs to be done to the forms.  Going back to the pre-2010 GFE will help.
     

     
    In conclusion, I think many parts of the form are still too detailed and too difficult for the average consumer to understand.  It will be interesting

  • http://www.eSettlementSolutions.com Larry Arch

    I think there has been significant progress on the forms, but there are issues remaining.
    There really needs to be a disclosure of the closing date upon which the estimate is based. The payoff (which in an actual disclosure will have to be included if the “cash to close” estimate is intended to be accurate) will depend on the closing date as will the prepaid interest and the initial escrow calculation. If these forms are going to be useful for comparison shopping, the consumer needs to be able to look at the form and see whether differences in costs are a result of different closing dates or some other cause. Backing into the closing date from the number of days of prepaid interest is probably too subtle for most consumers.
    Showing the minimum and maximum after each adjustment is good.
    In the Nandina and Jasmine examples, the estimated monthly escrows are different. What would cause this if both estimates are based on the same tax and insurance payments?
    On the Projected monthly payment line, at first glance it looks like the escrow payments total $854/$913. This could be easily modified for clarity.
    The comparisons section is misleading without disclosure of the underlying assumptions. What are the assumptions on the interest rate after the first adjustment date? Without this information the numbers are meaningless. Worse, they imply certainty when none exists.
    Depending on the consumer’s plans, the APR and TIP may be misleading. If the consumer is going to sell the house in 3 years, the APR should be lower for Nandina than Jasmine, but the form has it higher. As the underlying assumptions are a mystery, the consumer will likely be confused or misled by the APR.
    Similarly, with respect to the TIP, few if any people plan on holding a loan for a 30 year term. Few if any people compare loans based on an extrapolation of the payments over that period. Especially with a loan that will adjust multiple times over 30 years, any assumption on the total interest over 30 years is as accurate as predicting the weather. The impact of the very high percentages is to scare the hell out of consumers, but to what benefit?
    Moreover, each loan has a different index, which is an additional factor limiting the validity of the TIP and APR for comparison purposes on an adjustable loan.
    In this case the Nandina loan has a lower initial interest rate, but a higher APR and higher TIP. It is not obvious why this is the case. Buried in the fine print is that after the first adjustment date the Nandia loan has a minimum rate of 5%. Presumably this is the reason; but as the assumptions underlying the calculations are not disclosed, it is impossible to evaluate the validity of the numbers and therefore it undermines the usefulness of the disclosures. Is your typical consumer going to understand all the nuances?
    On the second page, the “Services You Cannot Shop For” are not itemized. Why not? They are different on the two loans, but the consumer cannot discern the reason.
    Why aren’t transfer taxes and recording fees “closing costs?” Everything that is a cost of closing the loan should be included. Prepaid interest, escrows, and property tax & insurance payments should be excluded.
    The form may be useful comparing similar loans, but it is very difficult to create a simple form to compare loans with divergent features. It is also very difficult to accurately synthesize adjustable loans and loans with complex features into a simple, standardized disclosure form. It is possible that a less ambitious form may actually be better for the consumer.

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