The Consumer Financial Protection Bureau's (CFPB) prototypes for a single mortgage disclosure form won praise from industry groups Wednesday for their streamlined format, as well as the unorthodox way they are being developed.
Under the Dodd-Frank Act, the CFPB does not have to issue a final version of the form until July 2012. But the bureau has already invited industry representatives, bankers and consumer advocates to weigh in on the model forms, which will be tested on focus groups and revised throughout the summer before the formal rulemaking process even begins.
"I think what was probably the most refreshing was just the fact that you had a room of bankers there … folks who use this every single day and have to explain it to customers every single day," Ron Haynie, the president and CEO of ICBA Mortgage, said about a meeting with CFPB officials this week. "And the folks at the CFPB were asking questions — does this work? They want the feedback, and bankers are not a shy bunch."
Haynie and other industry observers said the two prototypes released Wednesday are a good first step toward merging the disclosure forms required under the Truth in Lending Act and Real Estate Settlement Procedures Act.
"Our bankers felt that this was clearer, more to the point, and was a substantial improvement" over existing disclosure forms, said Bob Davis, executive vice president of government relations for the American Bankers Association (ABA), who also met with CFPB officials and several bankers on Tuesday. "So they welcomed seeing this."
Each form has a slightly different design, but both would break down the mortgage offer to highlight key terms, such as interest rate and monthly payment, and would caution borrowers about certain terms, such as increasing loan amounts or balloon payments.
Both also include a section to help consumers compare the offer with other loans, and lays out projected payments over the life of the loan. They break down expected closing costs, and use check boxes to indicate whether a loan requires an escrow account or mortgage insurance.
Although it was still early, the reviews for both forms were positive.
Stephen Ornstein, a partner at SNR Denton, said the forms are and easy to understand. The section for projected payments and "cautions" is particularly helpful.
"As jaded a compliance attorney as I am, I think they're terrific," Ornstein said. "Particularly the first one."
Norma Garcia, a senior attorney with the Consumers Union, agreed.
"They both do a great job of laying out the essential information. However, I think disclosure 1 is easier to navigate," Garcia said. "It's visually easier to break the essential information into parts that make it easy for a consumer to digest."
Industry representatives were also pleased.
"It seems like they're trying to make an effort to have things that are clear to the eye, and also to use language that consumers understand," said Elizabeth Eurgubian, a vice president and regulatory counsel at the Independent Community Bankers of America. "That being said, they're not there yet. But the process has started."
David H. Stevens, the president and CEO of the Mortgage Bankers Association, said in a press release Wednesday that the CFPB staff put a lot of thought into the new forms, and the MBA looks forward to participating in the revision process.
"One of MBA's primary goals will be to make certain that not only do the new forms provide consumers with the information they need in a simple, clean way, but also that they can be implemented into lenders' operations and systems with a minimum of disruption," he said.
Stevens also noted that the industry "expended considerable costs" on Respa changes just 18 months ago.
"We need to make sure that this new form is highly beneficial to consumers who will bear the implementation costs," he added.
The Dodd-Frank Act directed the CFPB to merge the TILA and Respa forms, which are two and three pages long, respectively, and have overlapping information.
The bureau plans to test the prototypes with focus groups before beginning a formal rulemaking process. It will conduct five rounds of evaluation and revision through September 2011 to select a single draft disclosure and then refine it.
"We're just going to keep testing this thing," Elizabeth Warren, the administration's point person in charge of setting up the CFPB, said in a conference call with reporters on Wednesday. "We're going to listen to comments, adjust and retest, until, with lots of help from the public, from industry, we believe we have this right."
Some were optimistic that the CFPB's process will set the standard for how the new agency develops rules in the future.
"This shows the CFPB wants to make regulation work better, because they're rolling these out early, they're showing them to bankers and consumers, they're going to be testing them, and this is doing regulation better," said Edmund Mierzwinski, the consumer program director at the U.S. Public Interest Research Group. "It's not more government, it's better government. So that's I think the exciting thing."
Reaching out to the public so early in the process is something that no other federal agency, and certainly no banking regulator, has ever done before, said Travis Plunkett, a legislative director at the Consumer Federation of America.
"To me this is a model for what the consumer bureau can become, in terms of reaching out to the public and getting input not just from the usual suspects — and that includes us, by the way — but from borrowers affected by the regulations that they're considering," Plunkett said.
Richard Riese, director of the ABA's Center for Regulatory Compliance, said the bureau has tried to engage both bankers and consumer advocates on how to communicate useful information to consumers about their mortgage transaction. That allows stakeholders to focus first on the quality of the forms, rather than the legalese, Riese said.
"I think this, as Elizabeth Warren has said on numerous occasions … is an approach that if they think it's producing good results and other people feel that the process was worth engaging in because of those results, then it could be applicable in future standard settings," Riese said.
There may be some risk to the open nature of the process, especially because it doesn't follow normal rulemaking protocols, Riese said.
"But it doesn't mean that they won't get to the normal process down the line to ensure that the legal hurdles have been met," he said. "It's that she is enabling people to see … more of the sausage-making that goes into how you get to a more formal proposal."
The bureau also plans to conduct additional analysis and research over the summer, and consider underlying regulatory issues and ways to refine closing-stage mortgage forms, a process that will likely extend into the fall and early next year.
CFPB must issue the proposed forms and regulations for formal notice and comment by July 2012.