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New mortgage forms aim for transparency

"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," Consumer Financial Protection Bureau director Richard Cordray says. Credit: Getty Images, 2011

The government has proposed new rules to help Americans understand the costs and risks of getting a mortgage.

The Consumer Financial Protection Bureau last week unveiled redesigned forms that mortgage borrowers would get after applying for a loan but before closing on the house. The forms would be available three days before closing.

"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 remarks prepared for a speech in Las Vegas.

He said the overhaul of mortgage forms "provides much-needed transparency in the mortgage market and gives consumers greater power" over the process of buying a home.

The proposal aims to prevent costly surprises and help people understand the true cost of a loan. It also increases protections for consumers who take out higher-cost mortgages.

Most of the changes were required by Congress under the 2010 financial overhaul law. That law created the consumer agency in part to protect Americans from unaffordable mortgage loans or those with hidden fees and other traps.

The proposal is the bureau's first that would change how people get mortgages.

For more than 30 years, federal law has required lenders to give home buyers two overlapping sets of disclosure forms.

The forms confused many mortgage lenders and consumers because they contained similar information, but were required by different laws and designed by two different agencies.

The CFPB's proposal would have two forms, one that describes the mortgage and one that outlines the costs of closing on the mortgage:

A "loan estimate," outlining key features, costs and risks of a mortgage, would be provided to people within three days after they submit a loan application.

A "closing disclosure," to help people understand the costs of closing, would be provided at least three days before closing.

The forms would also help people compare the cost of different loan offers, including the cost of the loans over time.

The rules would apply to most home mortgages, but not to home equity lines of credit, reverse mortgages and other specialized loans.

The proposal is part of an ongoing overhaul of the mortgage market. Already, under the financial overhaul law, mortgage brokers can no longer receive bonuses for convincing people to get higher-cost loans.

It also bans last-minute changes to closing costs. Lenders generally would not be allowed to charge people more for closing than the amount listed in the loan estimate form.

To protect vulnerable borrowers with imperfect credit, the proposal expands what is considered a "high-cost mortgage," a mortgage with an interest rate or fees deemed to be steep. People who receive such loans would receive special protections.Under the rule, people with high-cost mortgages wouldn't face balloon payments -- large lump-sums that typically are due at the end of a loan. Lenders also could not charge these consumers a penalty for loan prepayments.

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