CFPB Finalizes ‘Know Before You Owe’ Mortgage Disclosures

The Consumer Financial Protection Bureau (CFPB) is issuing a rule Wednesday requiring lenders to use its mortgage disclosure templates to lay out the terms of home loans for borrowers.

The new Know Before You Owe mortgage forms will replace existing federal disclosures, and the CFPB says they’ll help consumers better understand their options, comparison shop for the best mortgage deals, and avoid costly surprises at the closing table.

“Taking out a mortgage is one of the biggest financial decisions a consumer will ever make,” said CFPB Director Richard Cordray. “Today’s rule is an important step toward the consumer having greater control over the mortgage loan process.”

For more than 30 years, mortgage lenders have been required by federal law to deliver two different, overlapping disclosures to prospective borrowers within three business days of receiving their application for a home loan. At the closing stage of the loan process, federal law again generally requires two additional forms.

All of these forms contain duplicative and sometimes confusing information, according to the CFPB. The Dodd-Frank Wall Street Reform and Consumer Protection Act sought to simplify and streamline this information for consumers and transferred responsibility for the mortgage disclosure forms to the CFPB.

Wednesday’s final rule from the CFPB requires that lenders use the bureau’s two new disclosures, puts in place rules about when the new forms are given to consumers, and limits changes between the original loan estimate and the final deal. The forms are available in English and Spanish.

– The Loan Estimate: This form will be provided to consumers within three business days after they submit a loan application. It replaces the early statement required by the Truth in Lending Act (TILA) and the Good Faith Estimate (GFE), and provides a summary of the key loan terms and estimated loan and closing costs. The CFPB encourages consumers to use this new initial form to compare the costs and features of different loans.

– The Closing Disclosure: Consumers will receive this form three business days before closing on a loan. It replaces the finalTILA statement and the HUD-1 settlement statement. This second form provides borrowers a detailed accounting of the transaction.

An extensive study conducted by the CFPB confirmed the benefits of the new forms. Consumers of all different experience levels, with different loan types—whether focused on buying a home or refinancing—were able to understand CFPB’s new forms better than the current forms, according to the bureau. Testing showed participants who used the CFPB’s new forms were better able to answer questions about a sample loan, exhibiting a statistically significant 29 percent improvement in comprehension.

Importantly, officials say consumers were better able to decide whether they could afford the loan, including the cost of the loan over time. The CFPB says its new forms help consumers better understand key information, such as risk factors, short-term and long-term costs, and their monthly obligations.

The rule requiring the new “Know Before You Owe” disclosures becomes effective August 1, 2015.



NAR: Home prices grow across most metropolitans

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Most metropolitan areas in the third quarter experienced robust year-over-year price gains, with the national median price posting the strongest annual growth in almost eight years, according to the latest National Association of Realtors report.

The median existing single-family home price climbed in 88% of measured markets, with 144 out of 163 metropolitan statistical areas experiencing gains based on closings in the third quarter compared to last year.

Meanwhile, 54 areas, 33%, had double-digit increases, while 19 had price declines.

Lawrence Yun, NAR chief economist, said market momentum is changing. “Rising prices and higher interest rates have taken a bite out of housing affordability,” he said. “However, we have the ongoing situation of more buyers than sellers in the market, so lower sales will help to take the pressure off home price growth and allow them to rise slowly at a single-digit growth rate in 2014.”


How to get Rid of your Mortgage Insurance

For FHA loans endorsed prior to June 3, 2013, the MIP cancellation terms are as follows:

  • 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and annual MIP has been paid for at least 60 months.
  • 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement for MIP to be paid for at least 60 months.

Note that the loan-to-value calculation is not based on the current appraised value of the home; it’s based on the FHA’s last known value of the home. In many situations, the last known value is the home’s purchase price.

Using these rules, homeowners with a 30-year fixed rate FHA mortgage must pay mortgage insurance for at least five years before it can go away. Homeowners with a 15-year fixed-rate FHA mortgage can have MIP removed as soon as LTV drops to 78%.


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