The federal government’s consumer financial watchdog will require lenders to issue shorter, easier-to-understand mortgage disclosure forms to home buyers that more clearly show the costs and terms of the loans.
The Consumer Financial Protection Bureau issued the rule Wednesday, following through on an initiative launched in 2011 as the then-fledgling agency’s first major action.
The early Know Before You Owe forms were welcomed by consumer and industry groups as an improvement over the more complex disclosures required under federal law for more than 30 years. The bureau said the new forms would make it easier for home buyers to compare loan offers.
“Taking out a mortgage is one of the biggest financial decisions a consumer will ever make,” said Richard Cordray, the bureau’s director. “Our new Know Before You Owe mortgage forms improve consumer understanding, aid comparison shopping and help prevent closing … surprises for consumers.”
Lenders will be required to use the new forms, available in English and Spanish, starting Aug. 1, 2015.
The forms will be given to prospective home buyers when they apply for a mortgage and when they close on the loan. They will provide detailed information such as the estimated monthly principal and interest payments, closing costs, and any prepayment penalties or balloon payments.
The new loan estimate form and the closing disclosure form use large and bold type for important information such as the interest rate and feature highlighted headings and terms to make them easier to read.
Lenders will be required to give the new closing disclosure form to home buyers three days before the closing. That will give borrowers time to read and understand the information before the loan closes. Under the bureau’s new rule, lenders will not be allowed to change the fees and costs on the form at the closing “unless there is a legitimate reason.”
The bureau gathered public and industry feedback on the forms after unveiling them in May 2011. Testing showed that consumers using the new forms were better able to answer questions about a proposed loan and know whether they would be able to afford it, the bureau said.