05/18/2011 03:36 pm ET | Updated Jul 18, 2011

Simpler Mortgage Forms Tested By New Consumer Protection Bureau

WASHINGTON (Dave Clarke) – The new consumer financial products agency is testing out slimmer and clearer mortgage disclosure forms, to make borrowers aware that loan payments may skyrocket and give them greater power to shop around for mortgages.

Two prototype mortgage documents released on Wednesday are some of the first products to come out of the Consumer Financial Protection Bureau, which was created by last year's Dodd-Frank financial reform law and is scheduled to formally open its doors on July 21.

The banking industry is eyeing the agency warily, concerned it will push them toward offering simple lending products that may fit fewer customers' needs and restrict their ability to offer more profitable products.

The new mortgage disclosure proposals are one of the first tests of how the agency will carry out its mandate.

Elizabeth Warren, the Harvard University law professor preparing the agency for its launch, said the agency's goal is to make financial products easier to understand so that consumers know the full cost of a loan and so they can compare what competitors are offering.

"This is about empowering consumers," Warren said on a call with reporters.

In the lead-up to the 2007-2009 financial crisis, lenders freely extended mortgages to subprime borrowers with little documentation of their ability to repay. Many of these loans came loaded with opaque terms that resulted in skyrocketing payments, pushing huge numbers of borrowers into foreclosure.

Under Dodd-Frank, the agency is charged with combining the disclosure forms required by two laws -- Real Estate Settlement Procedures and Truth in Lending acts - that borrowers receive when taking out a home loan.

Those forms are generally up to five pages in length and have been criticized as being difficult to decipher.

The two proposed forms released Wednesday are two pages.

A senior agency official said the first page of the prototypes is intended to give borrowers an overview of how much they will pay over the life of the loan and how their monthly payments may change.

The second page provides more detailed information in these areas as well as on closing costs.

The bureau said it intends to get feedback on the two prototypes through September before settling on a single form.
The forms are also posted on the agency website.

Under the law, a rule on the new forms is due by July 2012 but one will likely come out before then.
The agency official said they do not have a time table yet for its release.

(Editing by Steve Orlofsky)

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