For Elizabeth Warren, the Obama administration adviser setting up the Consumer Financial Protection Bureau, simpler mortgage paperwork is a “regulatory sweet spot” that will cut lender costs and borrower confusion.
That view hasn’t stopped battle lines from forming around the prototype “mortgage shopping sheet” the agency is planning to publish today. Industry groups say the revisions may lead to limits on innovation and variety in lending, while consumer advocates are resisting changes that might limit borrowers’ right to sue to stop a foreclosure.
The consumer bureau, created by the Dodd-Frank Act and set to begin work on July 21, is required to propose the simplified form by a year after its start date. Warren has said the goal is to have a document that succinctly shows the costs of a loan and gets to borrowers early enough to allow for comparison shopping.
“The papers come too late and are too complicated to be helpful to consumers,” she told the House Financial Services Committee at a March 16 hearing in comments about the current system. “By the time they see most of the papers, they are at the closing table being told ‘sign here, sign here.’”
Consumer bureau officials yesterday began showing bankers, mortgage brokers, realtors and consumer groups two prototypes that will be published today, according to two people present at the meetings. The prototypes reflect different design choices that the agency will test with consumers, rather than alternative policies on mortgage disclosure, said the people, who declined to be identified because the meetings weren’t public.
The forms are based on current law and regulations regarding what lenders have to disclose, the people said. The consumer bureau will not address when consumers should get the forms when it unveils the prototypes, they said.
Lack of Coordination
Until now, simplification of disclosures has been impeded by a lack of coordination between the Federal Reserve, which oversees the Truth in Lending Act, and the Department of Housing and Urban Development, which oversees the Real Estate Settlement Procedures Act, according to Warren. That obstacle will be removed when the consumer bureau takes over enforcement and regulation writing under both laws in July.
The changes have been touted by Warren as a way to improve service to consumers while helping community banks compete in a market dominated by lenders such as Wells Fargo & Co. and JPMorgan Chase & Co.
Lenders, however, may face billions of dollars in costs if the type and timing of documentation are changed and those costs could be passed on to consumers, according to David Stevens, the former Federal Housing Administration Commissioner who leads the Mortgage Bankers Association.
“Changes are expensive to operationalize,” said Stevens, who joined the Washington-based trade group this month as president and chief executive officer. “We are not against this, but we want to study the forms,” he said in an interview.
Warren’s plan could affect “everyone throughout the chain” of home finance, from title firms and loan originators to risk-hedging systems, said Stevens. The changes “could involve lawyers and create a class-action nightmare,” he said.
Warren explicitly touted regulatory simplification as a way to cut down on litigation during a question-and-answer session after a March 30 address to the U.S. Chamber of Commerce in Washington. The complexity of rules “produces people who allegedly do not comply and therefore the opportunity for a lawsuit,” she said.
Industry groups say the current paperwork burden in mortgage lending stems in part from the need to provide disclaimers designed to protect them against borrower lawsuits. An explicit safeguard against such suits, the groups argue, is a reasonable exchange for agreeing to use simpler documentation.
Alex Pollock, an American Enterprise Institute fellow who has met with Warren to discuss his own model mortgage disclosure form, has urged her to include a “safe harbor” to protect lenders from litigation if the terms of the completed loan match what was presented to the borrower.
“If they are telling you on the form the same thing they are using in the underwriting, then that should be a safe harbor for them,” he said in an interview. “You don’t want to create new ways for rapacious plaintiffs’s lawyers to go after lenders.”
That idea has drawn criticism from consumer advocacy groups who say it could eliminate the option of bringing a lawsuit based on a significant misstatement in mortgage documents.
Binding and Usable
“My concern is that we would lose the causes of action that we use to protect people who are being foreclosed on,” Ira Rheingold, executive director of the National Association of Consumer Advocates, said in an interview. “The tradeoff is if home buyers get something that is binding and usable.”
Pollock said homebuyers would benefit from getting the documents in time to compare the proposed terms before agreeing to a loan. Determining the correct timing will be a challenge for the consumer bureau, he said.
“You need the form as early as possible but not so early that you don’t have the data needed to fill out the form,” Pollock said.
Richard Thaler, a professor at the University of Chicago, has urged Warren to offer protection against lawsuits as a way to entice lenders to offer “plain vanilla” products instead of complex loans more likely to be misunderstood by consumers.
“Disclosure has limits if we allow products to be complicated,” Thaler, who had a March 22 meeting with Warren, said in an interview. “If you allow for lots of innovation, then the disclosure problems become insurmountable.”
Provisions requiring banks to offer “plain vanilla” products were dropped from the Dodd-Frank legislation during negotiations in the House of Representatives.
Banking-industry groups have expressed concern that safe harbor protection for loans with particular characteristics -- 30-year fixed-rate loans, for example -- would limit their ability to provide products such as adjustable-rate loans.
“It’s not clear to me if disclosure is about simplifying the documents or simplifying the product,” Bob Davis, executive vice president at the American Bankers Association, said in an interview. “If you simplify the product, you stifle innovation.”