By Manjeshamurthy Y.S.
The mortgage market is the single largest market for consumer financial products and services in the United States. During the last decade, the market has gone through an unprecedented cycle of expansion and contraction. It was fueled in part by the securitization of mortgages and creation of increasingly sophisticated derivative products designed to mitigate risks to the investors. During the subprime crisis, property values reduced drastically, many people lost jobs due to the economic condition and several of them left their underwater mortgage for foreclosure.
CFPB Initiative
As a step to consolidate the reasons for that situation, Consumer Financial Protection Bureau (CFPB) – which was created by Dodd-Frank Wall Street Reform and Consumer Protection Act – conducted a survey. Based on this survey, experts found that one of the reasons for that situation was - many borrowers availed loan with “no” or “less” understanding of their loan terms. As important information can be buried in the fine print of the current mortgage disclosure forms, consumers can have difficulty in understanding the true terms of their deal. With the current forms, consumers can have a hard time comparing their original loan terms with their final loan offer. Consumers need to be reasonably sure that the mortgage they signed up for is the one they are getting.
The mortgage market is the single largest market for consumer financial products and services in the United States. During the last decade, the market has gone through an unprecedented cycle of expansion and contraction. It was fueled in part by the securitization of mortgages and creation of increasingly sophisticated derivative products designed to mitigate risks to the investors. During the subprime crisis, property values reduced drastically, many people lost jobs due to the economic condition and several of them left their underwater mortgage for foreclosure.
CFPB Initiative
As a step to consolidate the reasons for that situation, Consumer Financial Protection Bureau (CFPB) – which was created by Dodd-Frank Wall Street Reform and Consumer Protection Act – conducted a survey. Based on this survey, experts found that one of the reasons for that situation was - many borrowers availed loan with “no” or “less” understanding of their loan terms. As important information can be buried in the fine print of the current mortgage disclosure forms, consumers can have difficulty in understanding the true terms of their deal. With the current forms, consumers can have a hard time comparing their original loan terms with their final loan offer. Consumers need to be reasonably sure that the mortgage they signed up for is the one they are getting.
As a measure to improve consumer understanding, CFPB issued final rules on November 20, 2013 that amended existing requirements for mortgage disclosures. Specifically, the rules amend components of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) that have been in effect for more than 30 years. Existing rules require lenders and settlement agents to give consumers who apply for and obtain mortgage loan two sets (Good Faith Estimate and Truth in Lending Disclosure) of different, but overlapping disclosure forms describing the loan terms and costs. As the CFPB observed, “this duplication has long been recognized as inefficient and confusing for both, the consumers and the industry.” The new rules fulfill a Dodd-Frank Act requirement to address this duplication by combining the two sets of disclosures that consumers receive under TILA and RESPA in connection with applying for and closing on mortgage loan. The resulting disclosure forms under the new rules replace the current forms:
- The new Loan Estimate (LE) replaces the existing Good Faith Estimate (GFE) and the initial TILA disclosures
- The new closing disclosure replaces the HUD-1 and final TILA disclosure
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