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) -- The Consumer Finance Protection Bureau is doing consumers a solid with its redesigned mortgage disclosure forms, if it weren't for the small banks it will kill along the way.

For mortgage loan borrowers who have been confused by the Good Faith Estimate before their loan closes, the Bureau's proposal for a redesigned disclosure is quite an improvement.

Mortgage loan borrowers currently receive the Good Faith Estimate, which includes the loan amount, the term, the rate, points charged, origination fees, other fees for services including appraisal and survey, and charges for title insurance, document recording, etc. The borrower separately receives a Truth-In-Lending Disclosure Statement, which includes the total finance charge for the life of the loan -- if it is a fixed-rate loan -- and the "annual percentage rate," which is made up of the interest rate, plus all closing costs spread over the life of the loan.

The annual percentage rate is a very confusing item.

The CFPB's proposed

Loan Estimate

clearly spells out key features of the loan, including any prepayment penalty, balloon payment or negative amortization feature, right at the top. The form also has a much cleaner format, making it easy to read.

The new Loan Estimate includes all of the information in the Good Faith Estimate and the Truth-In-Lending disclosure, cutting two pages from the total. At closing, borrowers would receive a redesigned

Closing Disclosure

, which is much easier to read and understand than the current HUD Settlement Statement

CFPB director Richard Cordray said on July 9 that the "proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home."

So what's not to like?

"The bureau is stitching together what is a veritable thicket of statutes and regulations," says Jerry Comizio -- the chair of the Global Banking practice of Paul Hastings, based in Washington, D.C. -- but "there is a certain paradox in them being given this mission and putting out a proposal that is 1,097 pages."

Comizio says it's unusual that the Consumer Financial Protection Bureau's "rulemaking proposal does not have a specific closing date," although public comments on the proposal are due by November 6. The Bureau "realizes that "any kind of redo of these forms is going to require extensive efforts by lenders, mortgage brokers and settlement agencies to make revisions to their software and retrain their staffs."

The Bureau said that its proposal "took into consideration 10 rounds of testing with consumers and industry and feedback from the public on multiple prototype forms over the past 18 months," including "tens of thousands of comments."

An interesting point raised by Comizio is that the Bureau has "pulled a lot of jurisdiction for this issue from othr federal agencies. One question is, has this been a collaborative process with other agencies? Will other agencies see fit to comment on the record for this proposal or not?"

The prospect of interagency disagreement over the proposal, would be particularly ugly for banks that are already reeling from the regulatory changes, as nearly half of the regulations springing from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have not yet been enacted.

"One thing that puts this into sharp focus is that "the industry will have to get used the fact that this agency is not like the ones that regulate the institutions, but is looking through a telescope that represents what consumers see."

In the wake of the CFPB's

harsh action


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over third-party's vendors' marketing of add-on services to credit card borrowers, Comozio says that "the caution to banks and mortgage originators is that you will have to look very carefully to make sure your policies are updated for loan modifications, servicing and vendor relationships because the agencies are putting this higher up on the radar screen, for sure."

Comizio says "the reality on the ground is that any lending institution needs to be doing a very hands-on overhaul of both its intake and servicing system, processing and relationships, to make sure that they are ready to comply with the laws and regulations, and that the lender is overseeing

vendors to ensure the functions are being done as if done by the bank itself."

With the reality of harsh penalties for compliance failures being handed down from the Consumer Financial Protection Board, smaller mortgage lenders may wish to begin brining outsourced mortgage origination services in-house, for easier control.

With hundreds of regulatory orders handed down to banks over the past four years, requiring reviews of the qualification of members of senior management and even board members, and with the ever increasing compliance burden, not to mention significantly higher capital requirements proposed in June for most banks, Comizio sees the writing on the wall for hundreds, if not thousands of the nation's 7,300 banks and savings and loan associations.

"The industry has not yet felt the tsunami effect of Dodd-Frank, since over 45% of the regulations have not been applied yet, and that included capital rules," he says, adding that "over the next five years, you can see one quarter of the remaining banks gone."


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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.