Mortgages Key Part of Obama Reform

All in one
The administration proposes creating a Consumer Financial Protection Agency, or CFPA. Right now, a constellation of agencies regulates mortgages, depending on who originates them. States regulate mortgage brokers. Savings and loans are regulated by one agency and national banks are regulated by others. The Federal Reserve oversees one set of disclosures you get when you apply for a mortgage, and the Department of Housing and Urban Development oversees another batch of disclosures. The CFPA would gather all of these oversight activities under its umbrella.
The new agency would define the plain-vanilla home loans, including adjustable-rate mortgages. Lenders that offer these loans would have to get full income documentation, collect escrow for taxes and insurance, make monthly payments predictable, and could not charge prepayment penalties. Mortgage lenders would have to offer these simple mortgages. They would be allowed to offer more complex loans, too -- but consumers would have to jump through some hoops to get them. 

"The CFPA should be authorized to use a variety of measures to help ensure alternative mortgages were obtained only by consumers who understood the risks and could manage them," the proposal says. The agency "could impose a strong warning label on all alternative products; require providers to have applicants fill out financial experience questionnaires; or require providers to obtain the applicant's written 'opt-in' to such products."

The proposal says disclosure forms should be "clear, simple, and concise," and that they should be tested regularly. This is the third presidential administration in a row that has tried to make mortgage disclosures clear, simple and concise. The problem is that different stakeholders have different definitions of those terms. Furthermore, it's hard to make a clear document concise, and a concise document clear. And if a loan isn't simple, the explanation can't be simple, either.

Starting Jan. 1, 2010, mortgage lenders will be required to provide loan applicants with a simplified, three-page good-faith estimate of closing costs. It is supposed to be easier for consumers to understand. The simpler disclosure is a product of revamped regulations under a law called the Real Estate Settlement Procedures Act, or RESPA. The Obama administration is asking Congress to let RESPA reform proceed on schedule.

Another facet of RESPA reform is a rule that would make it harder for lenders to surprise borrowers at the closing table with higher-than-expected fees.