CFPB: Student Loan Debt Holding Back Homeownership, Economy

student loan debt hurting economyThe burden of student loan debt is preventing potential home buyers from starting households, which in turn is hindering overall economic growth, according to Consumer Financial Protection Bureau (CFPB) director Richard Cordray in remarks made on September 23.

“I believe we are standing at a precipice when it comes to student loan debt in this country,” Cordray said. “That load has reached $1.2 trillion, second only to mortgages as a category of consumer finance. This burden is growing fast and the issues that flow from it are central to public policy in America.”

The rising cost of tuition is causing higher student loan debt, which is in turn causing more borrowers to default. Cordray said CFPB estimates that more than seven million Americans are in default on more than $100 billion in student loan balances. For those who default at a young age, the black mark on their credit report may prevent them from buying a home – and might even keep them from getting a job, Cordray said.

“The domino effect of student loan debt is real, and it is spreading,” Cordray said. “It is hard to erase this debt quickly – paying it back may take many long years and prevent people from achieving other financial milestones.”

Thought leaders in the industry have long believed that reform is necessary in order to reduce skyrocketing student loan debt and free up the finances of would-be homebuyers.

“If we are truly committed to promoting homeownership for generations to come, it is time to address the more than $1.2 trillion of federal student loan debt that is crippling the finances of future homebuyers and keeping them from experiencing the promise of homeownership,” Five Star Institute President and CEO Ed Delgado said last week in his remarks to industry leaders at the 2014 Five Star Conference and Expo. “If Washington wants to make a real difference for the future of our children – we must reform student education financing.”

Cordray stated that young people are not forming new households at the same rate as they used to, and the decrease in household formation is preventing economic growth. Increased student debt is causing millennials to live with their parents until a later age, or to share living arrangements with peers.

“The homeownership rate for young people peaked before the financial crisis and by the first quarter of this year was down more than 15 percent,” Cordray said. “This is very troubling because most first-time homeowners are young people who drive the market for home purchases.”

The effects of heavy student debt are not felt in just the housing sector, Cordray said.

“Student debt burdens can get in the way of young people buying a car, starting a small business, or saving for retirement,” Cordray said. “We are deeply concerned about how debt influences career choices by acting as a barrier to public service for a rising share of student loan borrowers.”

Tools are available now to assist consumers with managing their student loan debt, Cordray said. CFPB has partnered with the Department of Education to develop a set of online tools known as “Paying for College,” which helps better educate students and their families as to what their financing options are when deciding how to cover educational costs. CFPB also offers answers to common questions it is asked regarding consumer finances (including student loans) in a feature known as “Ask CFPB.” Notably, Cordray said, CFPB now handles individual consumer complaints regarding student loans. Also, many who work in public service positions are eligible for student loan forgiveness, which “can enhance the affordability of public service careers,” Cordray said.

Cordray announced that two organizations, AmeriCorps and the Peace Corps, are both signing the pledge to help consumers handle student debt. CFPB includes employees who are alumni of both organizations.

“They are pledging to talk to employees about their options for student loan forgiveness, verify that they work for a public service organization, and check in with them annually to make sure they stay on track,” Cordray said. “We have also created toolkits for employers and employees to help them understand how to take advantage of these benefits. We want everyone eligible to be signing up for the loan forgiveness that federal law provides, which they are earning by virtue of their public service work. These are great first steps toward that objective.”


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.


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