Macey Throws Some Cold Water on the CFPB’s New Mortgage Disclosures
In the WSJ, Professor Macey takes measure of the CFPB’s new mortgage disclosures and finds them lacking:
The CFPB is proposing to revise the old forms into a new Loan Estimate Form and Closing Disclosure Form. The old loan form had been five pages; according to the agency website, the new one is three. The closing form remains at five pages. That’s a net savings of two pieces of paper. But the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.
In evaluating the substance of the new disclosure themselves, Macey concludes the new forms are likely to harm consumers rather than help them.
Do the new rules expand consumer choice? They would forbid many borrowers from making smaller payments every month, followed by a single, one-time balloon payment to retire the principal at the end. They also would cap late fees—which means borrowers would be unable to get a lower interest rate on a loan by agreeing to pay a penalty if they don’t make their payments on time.
The new rules restrict loan-modification fees, which means mortgagors will offer fewer options to do so. They restrict penalties on borrowers who pay off their home loans early. These prepayment fees compensate lenders for the risk of lower returns on their loans. Without this protection they will either decline to offer loans to some borrowers or charge a higher interest rate.
The government’s proposed rules require high-risk customers in high-cost loan markets to meet with financial counselors before taking out a loan. The regulators also want to expand dramatically the number of mortgages classified as high cost. But financial counselors will have to be compensated, whether their advice is good or bad. The law deprives these consumers of the right to do their own homework.
Oddly, hidden on the new disclosure forms is the Annual Percentage Rate. For decades the APR was front and center on government-mandated disclosure documents. It is the single number that shows borrowers the cost of borrowing including such factors as the interest rate, certain fees, and the maturity structure of the loan.
The CFPB claims its consumer testing showed people didn’t understand the APR. Yet if someone is trying to compare two loans—one with a lower interest rate and $15,000 in fees, the other with lower fees but a higher interest rate—it’s not possible to determine which loan is cheaper without the APR. The new rules do not attempt to generate a single number that can be used for comparison purposes and instead focus on various components of the loan such as fees, penalties, interest rates and maturity separately. This makes it harder, not easier, for borrowers to compare mortgage options.
Ultimately, we will be able to evaluate the impact of these new disclosures empirically by watching the results of the CFPB’s “experiment.”