The CFPB Rolls Out New Model Disclosures to Replace the GFE and Truth in Lending

A little more than 60 days from actually taking power as one of the most powerful government agencies ever created, the Consumer Financial Protection Bureau is busy completing one of its very first tasks--the creation of a new mortgage disclosure which will replace the existing good faith estimate and the existing truth in lending.

Regular readers of this blog know that I have been extremely critical of the CFPB in general and of the recent federal gymnastics by various agencies in an attempt to come up with a disclosure form that works.  I was the President of the El Paso Association of Mortgage Brokers in 2002 which HUD first introduced RESPA reform and the forerunner of the good faith estimate we are using today.  I was part of the letter writing campaign to Congress that stopped those initial attempts in 2004.  But, in spite of our efforts, in 2010, HUD did implement the new Good Faith Estimate.  In my opinion, the 2010 GFE is one of the most useless documents ever created.  It combines fees and costs so that borrowers cannot truly see what they are paying to the loan originator versus the lender.  This makes it virtually impossible to negotiate fees.  (However, as of April 1, the most recent Federal Reserve rules have ended negotiations between brokers and consumers on lender-paid loans anyway, so this is really not an issue anymore.)  My other major criticism of the 2010 good faith estimate is that it does not answer the three most important questions that consumers really do want to know:

1. How much is my total payment?
2. How much is my down payment?
3. How much money do I need to close?

In order to correct some of the issues, the Federal Reserve revised the truth in lending forms in January.  The new truth in lending form does contain the total payment to include taxes and insurance, but it still does not answer the other two questions.

Because of all of the regulatory nonsense that we have suffered through the past three years, I was extremely skeptical at the idea of still another form.  But I must admit that I was pleasantly surprised to see the sample forms that the CFPB is considering.  I am attaching the link here so that you can look at them for yourselves.   http://www.consumerfinance.gov/knowbeforeyouowe/about/

There are two sample forms; CFPB is accepting comments on them until May 27.  They are seeking input from both consumers and the lending community to include brokers and bankers.

So what do I like about the forms?  For starters, they are written plain English in large type that should be understandable to everyone.  The form contains the full amount of downpayment, the total dollar amount of closing costs, and the total amount that the borrower should expect to bring to closing with an additional note that any credits (for earnest money or fees paid outside of closing) will be credited toward that amount.

The form also lists clearly the principal and interest payments and the total estimated payment with taxes and insurance.  It details whether the loan is an adjustable rate or a fixed rate mortgage, and the maximum amount that the rate can increase to (lifetime cap) as well as the maximum amount that the house payment could increase to.  On the second page is a breakdown of all costs.  These are still bundled, a la the 2010 Good Faith Estimate.  In fact, the second page looks very much like page 2 of the 2010 Good Faith Estimate, so there is still a box for the owner's title insurance and a place where we will have to disclose the home warranties and pest inspections.  However, for borrowers this should provide a good, solid breakdown of what they can expect to spend on the transactions.

One comment that I would have about the new forms is that they list the origination fees at the top of page 2 in one box.  There is no box for lender credits or for adjusted origination fees immediately following the top box as we have today on our forms.  At the bottom of the form, there is a box for seller or lender credits.  In a lender-paid transaction where the originator is being paid by the lender, this could be very confusing to the borrower, since the lender credit would not appear until the bottom of the form.  In a comparison shopping scenario, that could cause the loan originated by an independent originator to appear much more expensive than its bank-originated counterpart.

The origination fee still cannot change and the other fees appear to be subject to a 10% tolerance as they are now.  The new form does say clearly in large type that the estimate is only good through a certain date and that after that date it is subject to change.

The two model disclosures are just a first step.  After the CFPB gets input from everyone they are supposed to hold round table discussions in LA, Albuquerque, Springfield MA, Baltimore, Chicago, and Birmingham.

Both NAMB and NAIHP have been allowed to weigh in on the new forms, so that is an encouraging sign for our industry. Log on to the link and give the CFPB some input.  At least this time, we are all going to have some say in our future.

For related posts, visit www.frontier2000.net.

Rumor Has It...

Rumors are flying that President Obama is about to appoint Linda Warren, Harvard Law Professor and Chair of the TARP Oversight Committee to be the new head of the Consumer Financial Protection Bureau. Supporters of the Bureau applaud Ms. Warren's possible nomination, since she is vocally on the side of consumer advocates and against the lending and credit industries.  Ms. Warren's anti-business and anti lending positions seem to conflict somewhat with her position as chair of TARP oversight where she was responsible for handing out bailouts to the very banking giants whom she claimed needed policing.  Still, the White House seems committed to its choice--so much so that President Obama may appoint Warren as an interim chair so that she can avoid the Senate confirmation process.

Senator Jeff Merkley (D- Oregon) posted an article on Huffington Post yesterday defending Warren.  "The new consumer watchdog will only be effective, however, if it has strong leadership.  There is no doubt in my mind that Elizabeth Warren is that leader.  She has been America's leading voice on behalf of financial fairness for families and the driving force behind the creation of the Consumer Financial Protection Bureau."  Not everyone in the Senate is such a fan, however.  Even Chris Dodd, for whom the Dodd Frank Financial bill is named, says that the votes may not be there to get Warren confirmed.  Senator Richard Shelby, (R Tx) wants a confirmation process so that Warren can be questioned and vetted  properly before the Senate turns over to her the responsibility for such a huge, powerful new agency.

My issue with Warren and, others like her, is that, political differences aside, she is an academic.  Rather than having our laws and policies written by business people, many of the new rules coming out of Washington are being written by professional politicians and university professors.  Teaching law at Harvard does not qualify any individual to head a major agency that writes rules for business.  In fact, in my opinion, it does not qualify an individual for anything except going into legal practice or being appointed to a judgeship.

The Consumer Financial Protection Bureau is going to have broad, sweeping powers to write whatever regulations it sees fit to govern and regulate all types of lending transactions including mortgages and credit cards.  It will have life and death power over many different types of businesses, from very tiny mortgage companies like mine to huge banking centers with assets of over $10 billion.  It will track consumer spending habits and purchases, and will determine what types of credit cards we can have and what types of mortgages are available.  It has not only the right, but the responsibility, to call in the IRS on any business that it supervises which it suspects might not be paying its taxes properly.  It seems to me that if such an agency is going to exist at all, it should be headed by an individual with many years of real world business and lending experience.  The director should be someone who knows in practical terms what works and what does not work in lending and credit.  He or she should be a person who understands the possible unintended consequences of legislation that might sound good but may end up costing the consumer a lot more money or might lead to even more credit restriction. 

To me this is one of the greatest problems with our country right now.  We have people with a lot of theory about how the economy should be run but no practical experience, so when their ideas do not work in the real world, they are shocked.  The politicians simply do not know how to react to real world crises that do not line up with their theoretical ideas.

Chris Dodd has warned the White House that if the President appoints Warren as interim director to sidestep the Senate confirmation process, Congress and the Senate may retaliate by de-funding the Consumer Financial Protection Bureau, essentially killing it before it has a chance to be born.  If that happens, Warren's appointment will have been responsible for the death of her beloved newly formed agency, and many businesses in this country will have dodged a bullet.  Maybe I was wrong--maybe the president should go ahead with his plans to appoint Warren after all.