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Consumer Bureau Releases Simpler Mortgage Forms for Testing

Americans applying for a mortgage would get a simplified, two-page “shopping sheet” from lenders under a proposal from the Consumer Financial Protection Bureau.

The agency today released two prototypes for the form, which include information such as interest rates, monthly payments and closing costs in bold type and an uncluttered format. The forms provide key figures on the first page, while delving into more detail on the second.

“With a clear, simple form, consumers will be in a better position to answer two basic questions: Can I afford this mortgage and can I get a better deal somewhere else?” Elizabeth Warren, the White House and Treasury adviser in charge of setting up the bureau, said in an e-mailed statement.

The new agency may propose regulations for mortgage disclosure forms before July 21, 2012, said a bureau official who spoke on condition of anonymity because that is the agency’s media policy. That date would be one year after the bureau is to officially begin operations, a timetable set by last year’s Dodd-Frank financial-regulation overhaul.

The form would replace the overlapping paperwork mandated by the Real Estate Settlement Procedures Act and the Truth In Lending Act, Warren told reporters in a conference call. Those two forms total five pages, she pointed out.

“It’s shorter -- a lot shorter,” said Ron Haynie, head of ICBA Mortgage, a part of the trade group Independent Community Bankers of America. “From that standpoint, it’s an improvement over the old forms.”

Community Banks

Warren has touted the simplified forms as a means to help community banks, which are frequently smaller, closely held firms, to compete against the giants in the field, such as Wells Fargo & Co. and JPMorgan Chase & Co. because borrowers could more easily make bank-to-bank fee comparisons.

The bureau will test the form with consumers, lenders and brokers, with the initial rounds including Spanish-language versions, according to the e-mailed statement. The tests will be held in Albuquerque, New Mexico; Birmingham, Alabama; Springfield, Massachusetts; Chicago; Baltimore; and Los Angeles.

“We are going to listen to comments, adjust and retest until, with lots of help from the public, from industry, we believe we have this right,” Warren told reporters on the call.

After the testing process concludes in September, the bureau will propose regulations that include a final version of the form. At that point, the bureau would address issues such as when the consumer would get the forms, which is important for comparison shopping, the bureau official said.

No Obligation

Norma Garcia, senior staff attorney for Consumers Union, the group that publishes Consumer Reports magazine, said that the prototypes include a clear statement that the borrower has no obligation to choose the loan outlined on the form.

“This statement will help encourage consumers to shop and compare products, which will have the added benefit of increasing competition among lenders for borrowers’ business,” Garcia said in an e-mailed statement.

Battle lines already have been forming around the bureau’s efforts to simplify disclosure. Lenders 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.

“We are not against this, but we want to study the forms,” Stevens said in an interview before the prototypes were released.

Borrower Lawsuits

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. The groups say that since simpler documentation could be costly to implement and could lead to limits on innovation and variety in lending, a reasonable exchange would be an explicit safeguard against such lawsuits.

Consumer groups have resisted the idea of a so-called safe harbor for lenders.

“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.”

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