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U.S. consumer watchdog to simplify home loan paperwork

Margaret Chadbourn
Wednesday, 20 Nov 2013 | 12:00 AM ET

WASHINGTON, Nov 20 (Reuters) - New rules to simplify the paperwork consumers receive when they apply for loans will take effect in August 2015 as part of a U.S. effort to make it easier to shop for mortgages.

The Consumer Financial Protection Bureau said on Wednesday that the measures are intended to ensure lenders clearly lay out the terms and costs of loans for home buyers.

The 2010 Dodd-Frank Wall Street reform law called for the agency to combine two sets of forms that can often confuse borrowers.

"Today's rule is an important step toward the consumer having greater control over the mortgage loan process," CFPB Director Richard Cordray said in a statement. "Taking out a mortgage is one of the biggest financial decisions a consumer will ever make."

Under federal law, mortgage applicants currently receive two disclosure forms, each complying with a separate federal statute. They also are given two additional forms upon closing on the loan.

Starting August 1, 2015, mortgage lenders must use the new forms and home buyers should be better able to understand the terms of the loan and their financial obligations. The process will also help consumers make more informed decisions when choosing a loan that is right for them, the agency said.

The CFPB said it would combine the sets of documents and create a "Loan Estimate" form to help borrowers understand the key features and risks of mortgages and a "Closing Disclosure" form that explains the costs of the transaction.

A Spanish-language version of the forms will also be made available.

In the period before the financial crisis, many consumers took out loans they could not afford. Consumers often underestimate interest rates and monthly payments sometimes increase during the life of a loan.

The CFPB spent more than two years conducting tests, including interviews with consumers, lenders and mortgage brokers, to create the simplified disclosure information.

The initiative to create the forms, called "Know Before You Owe," was started in 2011 under Massachusetts Democratic Senator Elizabeth Warren, who was running the agency at the time.

The new regulation could make it difficult for banks already implementing new mortgage rules.

The CFPB is set to impose mortgage underwriting requirements on lenders that take effect in January. In exchange, firms are given protection from lawsuits associated with loan origination. Among the requirements of the so-called qualified mortgage rule is that lenders confirm a borrower's ability to repay a loan.