Note: Michelle Singletary's regular Thursday column will not appear on May 26.
WASHINGTON - The Consumer Financial Protection Bureau has begun testing two prototypes of mortgage disclosure forms that the new agency hopes will help borrowers when applying for home loans.
So, why should this matter to you?
"This is about empowering consumers," said Elizabeth Warren, the presidential assistant who is setting up the bureau created to provide better protections for consumers. "A home loan is the biggest financial commitment most Americans will make in a lifetime. Getting stuck with the wrong home loan can cost tens of thousands of dollars over the life of the loan and sometimes it can even cost the family its home."
Did you understand the mortgage documents you signed when you bought your home?
I've fielded a number of questions from homeowners who have adjustable rate mortgages, or ARMS. Based on their questions, they only vaguely understood what an ARM was or even how their monthly payments could fluctuate.
The housing crisis that helped plunge the nation into a recession revealed a troubling thing about many home loan borrowers. Many didn't know how much they would owe. Borrowers were sitting in front of a thick stack of papers and just signing them. Many didn't understand even the type of loan they were getting and were shocked to discover it wasn't a conventional 30-year loan with a fixed interest rate. Instead, they were given exotic mortgages, and they didn't fully comprehend that their low teaser interest rates would eventually reset, pushing their monthly payments beyond their affordability.
I sat with borrowers who had no idea they had agreed to mortgage payments that would eventually increase to 50 percent, 60 percent and even 70 percent of their net monthly pay.
That's not how it's supposed to be. Current federal law requires that mortgage loan applicants receive two documents - the two-page federal Truth in Lending Act mortgage disclosure form and the three-page Real Estate Settlement Procedures Act Good Faith Estimate. Both forms are supposed to give borrowers fundamental information about their loans. It's supposed to help them comparison shop and inform them of how much they will owe.
"While they are intended to convey basic facts about home loans to help consumers comparison shop, these forms have overlapping information and complicated terms that can be difficult to understand," Warren said during a conference call with reporters.
It took the recession and a wave of foreclosures before Congress acted to require simpler mortgage disclosure forms. That task was assigned to the new consumer bureau. Last week, the agency announced the "Know Before You Owe" project to combine the two disclosure forms into a double-sided single document that should make the costs of a home loan clear.
The bureau is going to test the prototypes by conducting five rounds of evaluation. The testing will include versions in English and Spanish. Interviews will be conducted in six cities: Albuquerque, N.M.; Baltimore; Birmingham, Ala.; Chicago; Los Angeles; and Springfield, Mass.
But the general public can also weigh in with their opinions of the prototypes. And you should give your feedback. It might help to first view how the current forms look. Go to www.consumerfinance.gov. Click on the blog link for May 18. Then click on the links for "Truth in Lending form" and the "Good Faith Estimate."
Once you've seen the old forms, go to the "Know Before You Owe" page. Click on the link for the consumer tool. You will find two sample disclosure forms. The consumer bureau suggests that as you view them, you should think about these questions:
- Would this form help consumers understand the costs and risks of a mortgage?
- What would you like to see improved on the form?
- Is there some way to make things a bit clearer?
Compared to the current forms, both prototypes are far better. I particularly like the projected payments section, which spells out how a consumer's monthly mortgage payment could change over the years. However, in the section labeled "Adjustable Interest Rate Information," terms such as "index" and "margin" are not explained. It's vital that borrowers know what these terms mean because both directly impact monthly payments. If you have an ARM or you're considering one and you don't understand the terminology, go to www.investopedia.com, which has a useful financial dictionary. Search for "ARM index" and "ARM margin."
What the bureau is doing is quite significant. Like many of the new rules being implemented as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, updating the disclosure forms could help prevent people from taking on debt they can't afford.