Proposed Dodd-Frank mortgage changes still invite abuse of consumers-NY Times Editorial Board

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Lenders still able "to introduce last-minute changes at the closing table." Forms omit "the cost of title insurance and some other closing charges....New disclosures are weaker than the earlier proposal in other ways."

11/29/13, "What You Don’t Know About Mortgages," NY Times Editorial Board

"Thanks largely to new rules from the Consumer Financial Protection Bureau, taking out a mortgage is not the risky business it was during the bubble. But it is still the largest and most complex financial transaction in the lives of most people. And it still involves inherent imbalances in expertise between lenders and borrowers, including the use of intermediaries who may or may not be trustworthy. In short, conditions for abuse still exist. 

That is why the bureau’s new and long-awaited mortgage disclosure forms are important. It is also why they are disappointing. Required by the Dodd-Frank financial reform law, the new forms use an easy-to-read format to disclose complex terms; in addition to clear entries of principal, interest and closing costs, there is information on prepayment penalties and other complicated loan features. But the forms fall short in the crucial task of helping consumers assess and compare the total cost of various loans. Without that information, it is difficult for borrowers to know whether they are getting the best deal. 

What’s needed, as the National Consumer Law Center has pointed out, is prominent display of the loan’s full annual percentage rate, a single measure of the cost of credit that incorporates the interest rate, closing costs and other fees. On the new forms, that number is not reported until Page 3. Worse, it is calculated in a way that understates the loan’s cost, because it omits the cost of title insurance and some other closing charges. 

Both the bureau and the Federal Reserve had earlier proposed to include all closing costs in the annual percentage rate. The bureau says it changed its mind because including all costs might reduce the availability of certain kinds of loans. That may be true, but the loans it would restrict, in general, would be higher-priced loans, which would be subject to more regulation than lower priced ones. So lenders who resist regulation may resist offering them — which is as it should be. Better disclosure in itself does not restrict access to credit and, in fact, has been linked to reductions in the cost of credit because transparency fosters competition among lenders. 

The new disclosures are weaker than the earlier proposal in other ways. The agency had proposed that lenders be required to give borrowers a three-day review period whenever the loan terms were changed. The aim was to ensure that lenders would not spring new loan terms on borrowers at the last minute. The final rule limits but does not eliminate the lenders’ ability to introduce last-minute changes at the closing table. That’s too lenient. Lenders must be held to their promises. 

The bureau has stumbled on this one. The agency should act quickly to fix the flaws before the new rules and forms take effect, in 2015."

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