A final rule that makes mortgage disclosure better for consumers
(November 20, 2013) — Today, we’re issuing the TILA-RESPA final rule. This rule improves the way consumers receive information about mortgage loans, both when they apply and when they’re getting ready to close. Alongside the rule, we’re publishing information to help industry understand what the requirements are, such as how to fill out the disclosure forms. Helping with that understanding will be an ongoing process. We’re also publishing information about the project that got us here and what the new rule means for consumers.
We want it to be easier for consumers to shop effectively for mortgages and to make the decisions that work for them. We want consumers who are confident in the information they receive, the lenders they work with, and their ability to make good comparisons. This rule is a key part of that effort, so we’ve spent a lot of time testing the new disclosures with consumers who will them as well as industry who will have to explain them to consumers. The results of that testing show that our new disclosures make information clearer and easier to use.
What does the rule do?
The final rule contains new rules and forms for two disclosure forms consumers receive in the process of getting a mortgage loan: the Loan Estimate, which comes three business days after application, and the Closing Disclosure, which comes three business days before closing on the loan. These disclosures are required by the Truth in Lending Act and the Real Estate Settlement Procedures Act. The new forms integrate existing disclosures and implement some new disclosure requirements from the Dodd-Frank Act.
The rule also offers some more protections for consumers. For example, consumers must receive their Closing Disclosure three business days before closing on the loan so they have time to review it. The final rule also limits the circumstances in which consumers will have to pay more for settlement services than the estimate they received.
These disclosures and requirements will be effective August 1, 2015.
What’s new about the disclosures?
For most homebuyers, a home is the biggest purchase they’ll ever make. It’s also the most complicated financially, with a lot of paperwork to review and understand. The new forms simplify and clarify a lot of information. Essentially, our forms work to allow consumers to compare loans and make better informed decisions.
The new forms are shorter than the forms under current law. Our Loan Estimate is three pages long; the existing federal disclosures it replaces run at least seven pages. Our Closing Disclosure is five pages long and combines five pages of old forms, plus new disclosures required by the Dodd-Frank Act. This is only some of the information consumers get; lenders, investors, other agencies, and states require other documents. We are working with these other parties to figure out how to reduce the paperwork burden further.
But length isn’t the only factor. The documents need to be easy to understand and use. If we reduced page count but increased confusion, we did the wrong thing. We adopted a user-centered design process in creating these forms that made us confident we could clarify as we streamlined. It turns out we were right: the public made us better at our work.
How do we know they work better?
After we proposed the rule that would have required the new forms, we worked with Kleimann Communication Group to conduct additional qualitative testing as well as a quantitative validation study to measure how well the forms work. Before beginning the study, based on the comments we received on that proposal, we made a few changes to make the forms even better for consumers. These modified versions were the ones tested in the study. Today, we’ve published a report on the study, including its methodology, but what wowed us, and what we want to share here, is the results, which are striking.
We asked participants to answer questions on a written test about a sample mortgage. Those who used our new forms provided more correct answers than those who reviewed the current forms, an improvement of 28.8 percent. The margin of error was plus or minus 4.7 percentage points. Put another way, our new forms performed significantly better than the current forms.
These results are consistent when we break down the questions by different variables in the study, such as identifying numbers from one loan or comparing two loans, experienced or inexperienced mortgage consumers, reviewing a fixed rate or an interest-only adjustable rate loan, or focusing on interest rates or on payments. Which is to say: we are confident we didn’t end up with proposed disclosures that work well for one kind of mortgage loan experience but are confusing for others.
The testing showed that it’s not just that people could understand the new disclosures; they could talk about them, too. People who used the new forms could explain why they made choices they did and offered more comments about their choices than people who used the existing forms. This suggests the new forms may help people articulate their thoughts more clearly. That could mean better discussions with spouses, financial advisers, realtors, and others who help consumers in the process. It may mean more than just better financial results; it may mean a better shopping experience.
What comes next
The next step on the TILA-RESPA rule is developing an implementation support effort. We’re already working on this. Look for information soon that helps industry understand how to comply with the new rules, what they need to do to prepare, and more.
In January, the Title XIV rules become effective. Those rules codified many lending and servicing practices that help consumers and prohibited many practices that tend to get them in trouble. We’re also beginning to develop tools focused on consumers that can help them shop for their homes.
These three areas of work – requiring good information, requiring good practices, and offering useful tools – create the foundation for a better homebuying experience, one in which consumers understand prices and risks and have the clarity they need to make the best decisions for themselves and their families.