Robert,

Very informative blog and certainly some keen observations regarding the politics of the CFPB. It would be a real set-back to bury these much needed simplifications and changes to the current TIL-GFE/HUD forms' complexity.

A couple of points emerge when looking at the new GFE side.

It is interesting to note that the GFE# number system is eliminated and in its place is the alphabetical ordering A thru I. This would necessitate a change in the current HUD 1/1A forms which currently refer to the GFE# linking the information on the HUD pages.

There's been no discussion with tolerances at this stage but I would expect this will be addressed as the CFPB moves towards the final forms’ design. I would think the Department of Housing and Urban Development will have to get involved with these new developments at some point as RESPA mandates their oversight and I believe Dodd/Frank had a reference that HUD was to work with CFPB on these new forms.

I'm convinced the current promulgated GFE/HUD forms have not helped consumers understand any better the costs and accounting of their settlements, and to the contrary, have actually caused greater confusion. I guess the best one could argue is price-increase surpises at the closing table  have been reduced considerably.

I'm sure we're facing another round of software upgrades, orientation rules and other such matters as accompany these types of changes. But if the results are clearer, simpler and less costly settlements one has to vote in favor!

Consider the current Truth in Lending Disclosure; it contains the APR, the Finance Charge, the Amount Financed, and the Total of Payments.  Most consumer don't understand what these numbers represent - making the form nearly useless as a consumer disclosure.

In other words, why bother to educate the consumer when it's so much easier to just "dumb down" the forms?  To me, the TIL is simplicity itself: "here's how much you're borrowing; here's how much we're charging you; this is what it's gonna end up costing you after you make all the payments."  If memory serves, we learned about compounding and loan amortization schedules in my sophomore year in high school.  These days, even eighth graders should be able to figure this stuff out.

I know I'm gonna get hammered for saying this, but anyone who makes the biggest purchase of their life without a basic understanding of high school math deserves what they get.

Perhaps you would like to dazzle us with your "high school math" skills and explain to us how the APR is calculated and what the "amount financed" means on the Truth in Lending Disclosure.  While you are at it, please explain to us how any of this information is in any way valuable as a consumer disclosure - what is a borrower supposed to be able to determine from this information.

The point you are missing is that the new form has much more relevant information that is easy to understand.  How is that in any way "dumbing down" the form?  For example, the 5 year figure is much more relevant in comparing loans when the vast majority of people do not keep their loans for 30 years.  And, with a variable rate loan, the 30 year figures are all speculation and of very little real value.

Good points Robert!

The basic math of the APR equation is done so as to afford a prospective borrower with the real rate of interest being paid based upon the money the lender actually puts forth at the table.

For example, a lender agrees to loan $100,000.00 at 5% interest for 30 years. The payment based on those terms will be $536.82 monthly.

But in almost all cases the lender really doesn't put out the $100,000.00. They are receiving back items such as loan origination fees and other fees which are considered "prepaid finance charges".

So let's assume there is a 1.5% origination fee which would be $1,500.00. The Federal Reserve in this case wants the consumer/borrower to know that the lender is really only putting out $98,500.00.

If one then calculates the payments of $536.82 over 30 years on the principal amount of $98,500.00 the interest rate on that amount will increase. It is actually 5.133% under these circumstances.

The base equation to determine an actuarial annual percentage rate is expressed as follows:

Loan Amount = Payment / (1+i) + Payment / (1+i)<2nd power> .... + Payment / (1+i)<360th power> 

The exponent power is always the number of payments based on 12 payments a year. The equation will be a little different when considering other than monthly payments such as quarterly or semi-annual. And a little different still with bi-monthly and weekly payments.

So the i variable is moved up and down in value (binary search) until i allows the sums of (Payment / (1+i)) to equal the Loan Amount.

Because this equation is really the sum of 360 numbers (360 payments over 30 years) it was impossible before the personal computer to generate real time annual percentage rates. I'm sure some will remember the "factor tables" that were used many years ago where one would look up a factor on a chart to determine the APR quote.

Prior to the Federal Reserve requiring the TIL disclosure lenders could rack up enormous fees and a borrower would have no idea the "real effective" interest rate being paid. And this gains greater pertinenance when APR disclosures are limited with only one "estimated change".

I advocate that the worst case should be disclosed for each period. For example, if one takes a teaser loan at 5% and the adjustment will occur every 12 payments then the maximum adjustment should be used at each change period. Usually the terms would have a maximum interest rate of some percentage. So if one were to start at 5% with a 2% adjustment limit each period to a maximum of 12% the payments would increase as follows:

$  536.82 for  12 months at 5%
$  662.21 for  12 months at 7%
$  795.41 for  12 months at 9%
$  934.39 for  12 months at 11%
$1,005.27 for 311 months at 12% -- this being the remaining payment stream

The lenders argue that the worst case scenario might rarely happen and therefore disclosing the APR on this payment stream might scare off a borrower. But it provides a view at the other extreme from the teaser rate for the borrower to consider.

In the above payment stream the APR would actually be 10.339%! And if you considered a 1.5% origination fee it becomes 10.507%.

Looking at some of the adjustments in a sampling of subprime documents the increases in many instances weren't based on any economic factor such as the CPI (Consumer Price Index). It was  an arbitrary increase and the TIL disclosures were really inadequate to alert a borrower to what would ensue. It might be that the borrow wouldn't care but it sure would reinforce that fact if the worse case APR disclosure were the rule.

When a borrower really needs the money these disclosures are attempting to be helpful but I think the borrower's need for the money overrides any rate concern the borrower may have.

That's why we really need to look at usery and interest rate caps. It is really difficult to accept that we've allowed this financial bailed-out superstructure to provide the zillionairs of Greenwich with wholesale money at near 0%,  supplementing and supporting their fortunes, while savers get less than 1% and working folks are charged in many cases near 33% on their credit cards!!

But I think the assault on the new TIL form will be fairly heavy should disclosures begin unmasking the real underlying interest profit potentials. This might cause consumers to hesitate. Our leaders have deemed saving the financial system necessary to saving us all so any perceived impediments such as the CFPB will have a fairly steep hill to climb!

Nice explanation.  I had a situation recently where the APR was actually LOWER than the initial Note rate.  That really threw me for a curve and I had a heck of a time trying to figure out how that was even possible.  I had never seen that before.  If I couldn't understand it, after all of my years in the title business, I seriously doubt that the borrower had any idea what it meant.

It was actually due to a term in the note that entitled the borrower to a discounted interest rate after so many consecutive payments without being late.  They assumed for purposes of the APR that those decreases would actually happen.  In reality, the loan amount was almost twice the true value of the property (even though there was an appraisal that justified the loan amount), and the borrower had very shaky credit.  The initial interest rate was well over 9% in 2005!   Even with the ridiculous origination fee (I think it was around $8,000) the APR was still less than the Note rate!  It was clearly a subprime loan and it was very unlikely that the borrower would actually make all of his payments on time.

Personally, I think the new disclosures are much better at giving the borrower a true understanding of the important aspects of the mortgage that will better allow them to compare loans from bank to bank.

Robert,

The linked forms in your article have been transposed ("Option A" hot-link opens to "Option B" form).  For those who follow-through with a vote w/out confirming they've chosen their preferred version, the results of the voting might be affected.

I definitely prefer the Option A (as labeled on the Know Before You Owe site) - the "Cautions" section of Option B, IMO could be confusing and even misleading to consumers.  It presents the information in question/answer format - but the question used "Can loan features trigger higher or additional payments" and the "No" answers provided (with this particular example) could mislead the consumer into thinking he is NOT facing higher payments.  While clearly the sample is an adjustable rate product, and higher payments are clearly likely & disclosed elsewhere - IMO this Cautions section seems to conflict and would likely instigate a need for clarification of the information (probably landing in the lap of the closer).

Option A, while disclosing the same information, doesn't IMO present any such confusion and I will definitely be casting a vote for it!

Thank you for pointing that out, Renee.  I think I got confused because Option A has a file name of disclosure2, and Option B is disclosure1.  Seems backwards to me.  Sorry for the confusion.