The Consumer Financial Protection Bureau (CFPB) has released the second phase of its Know Before You Owe mortgage project, which will combine the two forms consumers get before finalizing a home loan into a single, easy-to-understand mortgage closing document.

The CFPB is asking for public feedback on two alternative prototypes, which are designed to clearly explain the final details of the loan and closing costs.

“Purchasing a home is one of the biggest financial decisions a consumer can make,” said Raj Date, Special Advisor to the Secretary of the Treasury on the CFPB. “Our goal is to help make the costs and risks clear at all stages of the mortgage process – from shopping for a mortgage to signing on the dotted line.”

Current federal law says that at or before closing on a mortgage loan, borrowers generally must be given two documents – the federal Truth in Lending Disclosure and the HUD-1 Settlement Statement. The CFPB is now combining these two forms. The CFPB is also consolidating other new and current federal mortgage disclosure requirements – boiling down unnecessary paperwork by as much as 50 percent.

The mortgage closing document prototypes build upon the feedback received in the first phase of the project, which focused on the loan estimates consumers receive shortly after they apply for a mortgage.

Over five rounds of testing different prototypes of these estimates, the CFPB received feedback from more than 24,000 members of the public, industry participants, and market experts. The second phase of this project incorporates that feedback into prototypes that provide more detailed information to consumers about their final loan terms and costs.

With CFPB’s prototype mortgage closing documents, consumers can clearly see whether the final loan terms and costs match the terms and costs quoted in the estimate provided after application. They can determine whether the interest rate or monthly payments could change after closing. And they can clearly see projected payments over the life of the loan.

The goal with the new form is to provide information in a clear and simple way that consumers will find easier to use and understand and that industry will find less burdensome.

In addition to soliciting public feedback online, CFPB is conducting qualitative testing on the prototypes in cities across the country starting today in Des Moines, Iowa. This testing will entail one-on-one conversations with consumers, lenders, brokers, and other industry professionals. The Bureau expects to conduct four rounds of testing and revisions through February 2012. The CFPB also plans to issue draft forms for public comment as part of notice and comment rulemaking procedures in July 2012.

Applications for U.S. home mortgages surged last week, driven by increased refinancing demand as interest rates dropped, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, climbed 10.3 percent in the week ended Nov 4.

"Treasury rates dropped last week, as renewed turmoil in Europe once again led to a flight to quality, and 30-year mortgage rates dropped to their second lowest level of the year," Mike Fratantoni, MBA's vice president of research and economics, said in a statement.

The MBA's seasonally adjusted index of refinancing applications rose 12.1 percent to its highest level in a month. Fratantoni said some lenders saw even bigger increases. Fixed 30-year mortgage rates dropped 9 basis points to average 4.22 percent.

The refinance share of total mortgage activity rose, after declining for three weeks, to 78.6 percent of applications from 77.1 percent the week before.

The gauge of loan requests for home purchases gained 4.8 percent.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

Reporting from Chicago—

Many consumers applying for a mortgage are going to start sharing more personal information with lenders next year, like it or not.

FICO scores, the industry standard for determining credit risk in mortgages backed by Fannie Mae, Freddie Mac and theFederal Housing Administration, largely have been based on a person's credit history. But in an attempt to develop a more well-rounded picture of a person's finances beyond credit, tools are being developed to help the lending industry dig deeper.

Fair Isaac Corp., or FICO, the company behind the widely used scoring formula, and data provider CoreLogic recently announced a collaboration that will result in a separate score that will be available to mortgage lenders and incorporates information that will include payday loans, evictions and child support payments. In the future, information on the status of utility, rent and cellphone payments may also be included.

Separately, the big three credit reporting companies — Experian, Equifax and TransUnion — recently began providing estimates of consumer income as a credit report option. And Experian this year began including data on on-time rental payments in its reports.

The new information could prove to be a double-edged sword for consumers: It may open the door to homeownership to some consumers who have, according to industryspeak, a "thin file" or worse, a "no file," meaning that they lack sufficient credit histories.

On the other hand, the extra information may make a borderline borrower look even worse on paper. Also, it's unlikely to quiet critics who complain that too much emphasis is put on a single number.

Still, there is thought among researchers that consumer transparency, if it demonstrates both good and bad behavior, has its place.

"You're trying to convince someone to loan you an awful lot of money at a low interest rate," said Michael Turner, president of the Policy and Economic Research Council. "Only you know whether you're going to pay it back. There is a harmony in this data exchange."

The FICO-CoreLogic partnership won't result in a credit score that will rule out a borrower for a mortgage backed by Fannie Mae, Freddie Mac or the FHA, which together own or guarantee at least 90% of the mortgages being written. That's because the report required for such a loan does not rely on CoreLogic data. However, it could affect mortgage fees or interest rates charged by lenders that in today's lending environment have heartily adopted risk-based pricing.

"We're fascinated to see, as we get into the data, whether that may expand the universe of people who can get a mortgage," said Joanne Gaskin, director of product management global scoring for FICO. "Banks are saying, 'How do I find ways to safely increase loan volume, to find the gems out there?'"

As a result, there's a rush by credit reporting firms to provide financial companies, including mortgage banks and credit card providers, with a wealth of information on individual customers.

"Before the [housing] bubble burst, there was a huge amount of interest in targeting the unbanked," said Brannan Johnston, an Experian vice president. "It was a desperate dash to try and grow and go after more and more consumers. When the bubble burst, that certainly dialed back some. They want to grow their business responsibly by taking good credit risks."

FICO scores have been around since the 1950s, but they didn't become a major factor in mortgage lending until 1995, when Fannie Mae and Freddie Mac began recommending their use to help determine a mortgage borrower's creditworthiness. The score, which ranges from 300 to 850, factors in how long borrowers have had credit, how they're using it and repaying it, and whether they have any judgments or delinquencies logged against them.

The change comes as mortgage lenders reward the most creditworthy borrowers with low rates and tack extra fees onto loans for those with lower credit scores.

There are concerns about whether inquiries and charge-offs from payday and online lenders should be included in determining credit scores.

"Payday loans are extremely onerous," said Chi Chi Wu, a staff attorney at the National Consumer Law Center. "They trap people in a cycle of debt. To report on them is to cite that person as financially distressed. We certainly don't think that's going to help people with a credit score."

The extra information may also help more affluent homeowners who aren't on the credit grid.

Two years ago, David Pendley, president of Avenue Mortgage Corp., worked with a college professor who didn't believe in using credit. "He was putting down 40% and he had the hardest time getting a loan, even though he had $120,000 in the bank and he was 22 years on the job."

Eventually, Pendley secured a loan for the customer through a private bank, but he paid for it. "He didn't get the lowest rate possible," Pendley recalled.