New Plain Language Mortgage Lending Rules Could Clear Up Borrower Confusion

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The Federal Savings Bank shares a new policy being taken by lender to make the mortgage paperwork process more understandable to applicants.

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When consumers do not fully comprehend the conditions of their mortgages, they may take on loans that they can't afford down the line.

As consumers delve deeper into the homebuying process, it's common practice to shop around for the best interest rate for their mortgage. Before they make the long-term financial commitment of purchasing a property, house hunters will have to talk to mortgage lenders about the terms and conditions of the home loan. To make this process simpler, mortgage lenders, like The Federal Savings Bank are preparing for compliance with new regulations that will require lenders to write out the terms of the mortgage in language regular consumers will understand. As new plain language regulations established by the Consumer Financial Protection Bureau for mortgage lending take effect, lenders will update the documents they present for borrowers by August 2015.

The rules aim to clear up confusion consumers may have about the homebuying process and the requirements for their mortgage. When consumers do not fully comprehend the conditions of their mortgages, they may take on loans that they can't afford down the line.

"When shopping for a mortgage loan, most consumers are concerned about the interest rate and their monthly payment," the CFPB wrote. "Consumers may underestimate that interest rates and payments can increase later on, or they may not fully understand that this possibility exists. They also may not appreciate other costs that could arise later, such as prepayment penalties."

Compliance deadline for new plain language rules
The Federal Savings Bank is expected to comply with these new regulations by August 2015, The Hill reported in September 2014.

CFPB Director Richard Corday said lenders are taking the time to plan for compliance with the plain language regulations, either through modifying their business processes or outsourcing compliance responsibilities to outside companies.

"While many mortgage institutions are already deep into the process of implementing these changes, we want to make sure that everyone understands the need to be focusing on August 2015 right now," Corday said, according to The Hill.

Changes to expect for mortgage disclosure forms
There are two new forms that The Federal Savings Bank will give to borrowers during the mortgage approval process starting Aug.1: one form after applying for the loan and the other after closing on the house, according to CFPB.

As part of the plain language rules, the key changes will allow lenders to better show borrowers the type of offer or loan they are providing, according to Forbes.

For example, CFPB suggested substituting the Good Faith Estimate and Truth-In-Lending disclosures with the Loan Estimate, or LE, which plainly describes how much they can borrow. As home buyers receive information about the loan, they will receive the LE three days before they agree to move forward with the loan process.

The new regulations make it easier for consumers to read through loan agreements and understand the amount they are taking on before they purchase a home. Simple mortgage lending language could bring more buyers into the market as it makes the homebuying process less intimidating to the average consumer and lowers risk for lenders because consumers understand which loans are right for their financial situation.

First-time home buyers interested in a mortgage should contact the Federal Savings Bank, a veteran owned bank, to learn more.

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