Consumer agency tests simpler mortgage forms

WASHINGTON Wed May 18, 2011 4:00pm EDT

Donald Bonner, 62, who has been delinquent on his mortgage payments for three to four months, speaks with a mortgage specialist at a JPMorgan Chase foreclosure consultation event in New York, March 31, 2011. REUTERS/Shannon Stapleton

Donald Bonner, 62, who has been delinquent on his mortgage payments for three to four months, speaks with a mortgage specialist at a JPMorgan Chase foreclosure consultation event in New York, March 31, 2011.

Credit: Reuters/Shannon Stapleton

WASHINGTON (Reuters) - The new U.S. consumer financial products agency is testing out slimmer and clearer mortgage disclosure forms, to make borrowers aware if loan payments may skyrocket and to give them greater power to shop around for home loans.

Two prototype mortgage documents released on Wednesday are some of the first products to come out of the Consumer Financial Protection Bureau, which was created by last year's Dodd-Frank financial oversight law and is scheduled to formally open its doors on July 21.

The banking industry is eyeing the agency warily, concerned it will push them toward offering simple lending products that may fit fewer customers' needs and restrict their ability to offer more profitable products.

The new mortgage disclosure proposals are one of the first tests of how the agency will carry out its mandate.

Elizabeth Warren, the Harvard University law professor preparing the agency for its launch, said the agency's goal is to make financial products easier to understand so that consumers know the full cost of a loan and so they can compare what competitors are offering.

"This is about empowering consumers," Warren said on a call with reporters.

Bank industry groups said they support simpler forms but remain cautious. Among the concerns is whether a simpler form could leave banks open to more lawsuits if a borrower argued they were not given enough information.

"We live in a litigious society," said Steven Zeisel, general counsel for the Consumer Bankers Association.

In the runup to the 2007-2009 financial crisis, lenders freely extended mortgages to subprime borrowers with little documentation of their ability to repay. Many of these loans came loaded with opaque terms that resulted in skyrocketing payments, pushing huge numbers of borrowers into foreclosure.

Under Dodd-Frank, the agency is charged with combining the disclosure forms required by two laws -- Real Estate Settlement Procedures and Truth in Lending acts - that borrowers receive when taking out a home loan.

Those forms are generally up to five pages in length and have been criticized as being difficult to decipher.

The two prototypes released Wednesday are just two pages, with differences mainly in the page layout of the information.

A senior agency official said the first page of the prototypes is intended to give borrowers an overview of how much they will pay over the life of the loan and how their monthly payments may change.

The second page provides more detailed information in these areas as well as on closing costs.

The bureau said it intends to get feedback on the two prototypes through September before settling on a single form.

Interviews will be conducted with lenders and borrowers in six cities, including Los Angeles and Chicago, as the agency revises the prototypes. The forms are also posted on the agency website for anyone to review at: here

Under the law, a rule on the new forms is due by July 2012 but one will likely come out before then.

Officials with the Independent Community Bankers of America said they are pleased the consumer agency is seeking feedback from lenders at the beginning of testing the new forms.

"What we don't want to see is a situation where there is piecemeal regulation where regulators come back and revisit it every year," said Elizabeth Eurgubian, ICBA's vice president and regulatory counsel.

(Editing by Steve Orlofsky; Editing by Tim Dobbyn)

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