Anyone who has bought a home knows how intimidating it can be to face the pile of mortgage paperwork. Borrowers feel they could sign away their life and not know it. This complexity helped stoke the epidemic of people buying houses with subprime mortgages they couldn't afford. But new commonsense rules proposed by the federal Consumer Financial Protection Bureau promise some relief for home buyers: plain English.
The bureau's creation was a hotly debated part of the Dodd-Frank financial reform law that passed in 2010 over Republican objections. But under the leadership of its director, Richard Cordray, the bureau is already fulfilling its mission to start cleaning up the way the financial industry treats its customers.
As part of the bureau's "Know Before You Owe" mortgage project, mortgage disclosure forms would have to be easier to understand with the loan's costs and risks laid out in clearer terms and plain language. Consumers will be able to quickly determine their interest rates, monthly payments, total loan costs and closing costs, including more information on taxes and insurance. If a loan has some risky elements such as prepayment penalties or negative amortization such as an interest-only loan where the loan balance increases over time, the new forms require clear warnings.
During the height of the housing boom and mortgage-securitization frenzy, mortgage brokers and banks put people in costly subprime mortgages even if some of them qualified as prime borrowers. Unsophisticated borrowers had little idea that they could be stuck with mortgages that ballooned after a low introductory rate, increased principal over time or carried expensive prepayment penalties.
The bureau's proposed rules will provide consumers timely information that they can act on. Within three days of applying for a mortgage, the borrower would receive a "loan estimate." A "closing disclosure" would have to be provided within three days of closing. The point is to give consumers full understanding of the mortgage they are getting into with enough advance notice for them to comparison shop or walk away.
This isn't the only place the consumer bureau is actively working on behalf of more transparency and fairness. It is also busy creating a database for complaints against credit card companies and investigating private student loans. The bureau is proving to be a federal regulator in the corner of the little guy. No wonder its industry opponents were worried.