Preparing for new mortgage disclosures: A look back at Know Before You Owe
This post is the first in a series. Today, we look at the origins of the Know Before You Owe project for simplifying mortgage disclosures. Tomorrow, we’ll look back at how the project unfolded. And very soon, we’ll explain a new proposed rule the CFPB is issuing to make mortgage disclosures more effective and easier to use.
Over the past thirteen months, the CFPB has developed a series of projects under the name Know Before You Owe: for mortgages, for student loans, and for credit cards. The idea is simple: When you buy a financial product or service, you should understand the terms you’re being 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, effective, and easy to understand.
In short, we believe in making disclosures simpler and more effective, and doing it with the input of the people who will actually use them. “Know Before You Owe” is our name for this participatory approach.
Where do mortgages come in? The CFPB is combining 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– into a single, and ideally simpler, set of forms. In May 2011, we began that effort with the disclosure you get after you apply.
If you’ve ever applied for a mortgage loan, you’ve received two forms required by federal law: a two-page Truth in Lending form and a three-page Good Faith Estimate. They are meant to give you the basic facts about home loans that you apply for and to help you pick the mortgage product that’s best for you. But these forms have overlapping information and complicated terms and are just plain difficult to understand.
We wanted the lenders, mortgage brokers, settlement agents, and consumers who will use the new combined forms to help as we developed them. We visited cities around the country to get in-depth feedback on how well the forms worked. We posted them online and asked for both consumer and industry feedback. Finally, we took extra steps to speak to small businesses affected by mortgage disclosures about their concerns, and we consulted with appropriate federal agencies.
As we started this process, we put forth three questions to define our approach to creating the new forms:
- Would the forms help consumers understand the true costs and risks of a mortgage?
- Could lenders and brokers clearly and easily explain the forms to their customers?
- What could be improved on the forms? Is there some way to make things a little bit clearer?
Over the past year, we’ve heard from consumers, designers, policymakers, financial institutions, legal and regulatory experts, systems vendors, and thousands of lenders, settlement agents, mortgage brokers, appraisers, closing attorneys, title agents, and real estate agents. Now, we’re almost ready to share the results: a proposed rule that meets our statutory obligation, and a single, simplified set of proposed forms.
Soon, we will submit a Notice of Proposed Rulemaking to the Federal Register to begin the public notice-and-comment process. When we submit the proposed rule, we’re also going to release a lot of interesting information here on our site: a side-by-side comparison of the existing forms and the new ones, reports on what we learned from testing the forms and from our discussions with small businesses, a timeline of the project leading up to this point, and a new way of presenting the rules and commentary that tell industry how to fill out the forms.
Tomorrow we’ll go into how we got here. For now, sign up here [list no longer available] if you want us to tell you as soon as we release the notice.