WASHINGTON — Mortgage disclosure forms, long considered baffling, incomprehensible and misleading, are about to get an overhaul, federal officials promised Friday.
In a bid to prevent misunderstandings and bait-and-switch tactics that have helped fuel today's mortgage crisis, U.S. housing officials proposed the first major overhaul of mortgage loan disclosures in 30 years.
Housing officials estimated that the proposal could save consumers an average of $670 on each loan because borrowers could finally make simple comparisons of loan terms and fees -- before they sign on the dotted line.
"It's not right that millions of consumers go to the settlement table without fully understanding the mountain of paperwork they are asked to sign and, on top of that, are expected to pay thousands of dollars in closing costs for services that they have never heard of," said Brian Montgomery, assistant secretary for housing at the Department of Housing and Urban Development, which proposed the rules.
As many homeowners can attest, the forms are complicated. They are intended to spell out the rates, terms and conditions on increasingly complicated mortgage loans.
But, the key elements of the loans -- such as balloon payments, prepayment penalties or other risks -- are often buried in pages of boilerplate language and confusing legalese.
The government's proposal Friday would drastically revamp mortgage disclosures, demanding that all key terms be disclosed on the first page of a new, four-page good-faith estimate that would be used by all lenders.
This estimate would prominently disclose whether the loan's interest rate could rise and whether the loan includes a prepayment penalty, as well as what the borrower can expect to pay upfront for appraisals and title insurance.
Moreover, the 96-page proposal, which updates the Real Estate Settlement Procedures Act (RESPA) that governs mortgage loans, would bar lenders from steeply hiking costs at closing -- a common complaint today -- by designating which fees could vary from the estimate and by how much.
"This is the most fantastic news consumers could have," said Jeff Lazerson, president of Mortgage Grader, an Internet-based loan broker. "We have needed this since RESPA was enacted in 1974. It was a poorly written law that protected crooked operators. This spells the end of bait-and-switch loan pricing."
The standardized good-faith estimate is the centerpiece of the initiative. But, housing officials also recommended that settlement agents read a prescribed script to borrowers at closing, informing them once again about key terms of the loan.
Some consumer advocates saw the proposal as only a first step that needed to be followed with legislation.
"We welcome anything that makes mortgage disclosures more clear and transparent," added Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "But Congress needs to act on the issue of enforceability."
Under current law, borrowers have little recourse if the estimate they receive when securing a loan turns out to be vastly different from the charges they pay at closing. Legislation needs to be passed to establish penalties, Fishbein said.
In addition, some consumer activists felt the proposal fell short in its treatment of payments that brokers receive when they steer borrowers into loans with higher rates than they could otherwise obtain. Such payments are called yield spread premiums. Under the HUD plan, these charges would have to be included on the estimate, but they would be lumped under a heading called "Our service charge." As a result, some borrowers would not understand what they were being charged for, critics say.
"That has left the door wide open for continuing abuses," said Howard Glaser, a mortgage industry consultant and former HUD official. "I think HUD blew an opportunity to move the mortgage brokers toward a fixed, flat-rate system that would have served borrowers much better."
Still, HUD officials said that in consumer testing, borrowers picked the lowest-cost loan with the proposed disclosures more than 90% of the time.
Agency officials added that the proposed disclosure was more neutral, because it did not discriminate between broker charges and those levied by a lender. Both types are ultimately passed on to the consumer, so who gets the fee is less important than the amount.
With that exception, Glaser said, the overall proposal was a step forward: "Getting consumers early, accurate and certain information is very meaningful," he said, describing the proposal as "a significant step" in that direction.
The public has 60 days to offer comments, which HUD must consider and potentially incorporate into any final proposal. If there are no snags, the agency could adopt the new rules within a year.
In the past, mortgage brokers, consumer activists and others have battled over proposals to overhaul the mortgage settlement process. A similar proposal was nixed two years ago, after the agency received tens of thousands of critical comments.
But some observers believe that in today's politically charged, crisis atmosphere it would be difficult to oppose loan reforms that are characterized as pro-consumer. Indeed, the initial response of brokers and lenders to the HUD proposal was friendly, if guarded. Although most said they had not reviewed the rule carefully enough to take an official position, they welcomed the improved disclosures.
"This proposed rule represents a major step forward in terms of consumer protections," said Roy DeLoach, executive vice president of the National Assn. of Mortgage Brokers.