WASHINGTON — Moving to address one of the principal factors that led to the nation's deep financial crisis, the new Consumer Financial Protection Bureau on Wednesday unveiled the first prototypes of what could become plain English mortgage-disclosure documents for consumers.
"It is always good for consumers to know the real cost of a mortgage," Elizabeth Warren, the adviser creating the new bureau, said in a conference call.
The two prototype documents made public Wednesday will be subjected to focus-group testing with consumers, lenders and real estate professionals. After that, there'll be at least five rounds of evaluation and revision, with an eye toward having a standard proposed by July 2012.
Although these two alternative versions of a new mortgage-disclosure document are preliminary, the "Know Before You Owe" effort marks an important change. It merges two federal-disclosure documents that currently are required when a consumer takes out a loan to purchase a home, and translates them from finance-speak into clear language that any buyer can understand.
This is important because banks weakened their lending standards and regulators were asleep at the switch during the housing boom that eventually triggered a near-collapse of the U.S. financial system. Borrowers received creative and often ill-suited loans that allowed them effectively to provide little or no proof of their ability to pay. Often these consumers had little understanding of how their low "teaser rates" on mortgages eventually would explode into unaffordable monthly mortgage payments.
The two prototypes for a new disclosure form address this. One highlights with graphics and spacing what a consumer would pay as a down payment, and the range of his or her payment in early years and then in later years. For consumers with conventional fixed-rate mortgages, this information also would provide comparisons over time to show how much of the loan balances have been paid.
For consumers who take out adjustable-rate mortgages, there would be useful information about the range of payments once the mortgages have reset to new rates.
An alternative prototype would focus more on the closing costs associated with the loan, highlighting costs for which a consumer can't shop around — appraisals and similar things required in-house by the lender — as well as costs for which they could. These include pest inspections, title services and title insurance. This document also would have information about monthly payments, but would feature it less prominently
Current federal requirements involve two pages for one disclosure form and three for the other. The bureau's proposed form would be a single page with simple information.
"With a clear, simple form, consumers can better answer two basic questions: 'Can I afford the mortgage, and can I get a better deal somewhere else?' " Warren said.
The first rounds of testing the prototypes will involve versions in English and Spanish, which is important because many Hispanic borrowers were preyed on in California and Florida. Interviews will be conducted in Albuquerque, N.M., Baltimore, Birmingham, Ala., Chicago, Los Angeles and Springfield, Mass.
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