Consumer Bureau Proposes Rules for Risky Mortgages


By Blake Ellis

NEW YORK -- The Consumer Financial Protection Bureau has proposed rules aimed at protecting more borrowers from getting stuck with mortgages carrying high rates and fees or risky terms.

The government's consumer watchdog is seeking to allow more consumers to qualify for the protections offered by the Home Ownership and Equity Protection Act by expanding the definition of what qualifies as a "high-cost mortgage." It's also offering more safeguards for these borrowers.

Under the CFPB's proposed rule, which was mandated by the Dodd-Frank Act in 2010, the APR and fee thresholds for "high-cost" mortgages have been modified to include more loans.

The proposed rule would also add more protections and prohibit certain risky features for these mortgages. The new rules generally ban balloon payments -- where a borrower pays off the loan's principal in a large, lump sum payment at the end of the loan term instead of making smaller payments throughout the term -- for high-cost mortgages. It also prohibits prepayment fees, as well as any fees associated with modifying or deferring loans, and caps late fees. Borrowers are also required to receive homeownership counseling before taking out a mortgage.

Currently, high-cost mortgages make up a tiny fraction of overall mortgages. Between 2004 and 2010, only 36,000 loans were made that qualified under the HOEPA protections.
The CFPB is accepting public comment about the proposal until Sept. 7, and final rules will be issued in January 2013.

'Know Before You Owe'

In addition to its "high-cost" mortgage rule, the CFPB also proposed new versions of two simplified mortgage disclosure forms on Monday.

As part of its "Know Before You Owe" project, the CFPB is attempting to simplify these forms in an effort to make it easier for consumers to understand and compare the terms and costs of mortgages.

"When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal," CFPB Director Richard Cordray said in a statement. "Our proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home."

The Loan Estimate form, which presents the costs and risks of a mortgage, is three pages long, down from the current 7 pages. Meanwhile, the Closing Disclosure, which contains final loan terms and closing costs and is given to borrowers before they close on a home, is five pages -- down from about nine pages.

The proposal would also require lenders to give consumers the loan estimate form within three days of requesting it, and consumers must receive the closing disclosure three days before closing on the loan.

The CFPB has released several prototypes of these forms over the past 18 months. The latest versions released on the CFPB's website Monday come after 10 rounds of testing with consumers and industry members and tens of thousands of comments.

The public will have until Nov. 6 to review and provide comments for most of the proposal, though comments about certain sections are due Sept. 7. The CFPB will issue the final rules regarding the form after reviewing these comments.

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