Big Changes Coming in the World of Home Loans
For most Americans, the ability to pay cash for a home is not a reality. As a result, purchasing a home means taking out a residential mortgage loan. Obtaining this loan can be a complex and confusing transaction, with many forms and disclosures that are unclear to most consumers.
On October 3rd, 2015, the Consumer Financial Protection Bureau (CFPB), the consumer watch dog for the Feds will roll out new disclosures that must be used when obtaining a home loan in the United States. These new disclosures, called the Loan Estimate and Closing Disclosure, will take the place of documents used in the lending industry for nearly three decades. They will replace the Good Faith Estimate, Truth-In-Lending, and the final HUD1.
Along with the new paperwork will come a new set of rules related to when the documents can be signed, how long the borrower has to review them, and ultimately, penalties to lenders for not adhering to these new requirements. There are major implications to the lending industry. Anyone considering buying a new home or refinancing an existing mortgage, will want to know about these coming changes.
With roughly 47,000 homes sold per month in 2014 just in California alone, a large number of residents have gone through the home buying experience. Prior to the financial crisis of 2007-2010, obtaining a mortgage loan was fairly straightforward. But if you’ve purchased or refinanced recently you most likely have experienced the challenges the lending industry is currently fraught with. The process is often tedious and slow, too many documents are required, and people often feel like they are not receiving the level of service they desire or need. As a result, people often feel uninformed, anxious, and frustrated.
In an effort to improve the overall consumer experience and in reaction to the financial crisis of 2007-2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The legislation gave birth to the CFPB. The ultimate goal of the CFPB is to “help consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives”.
Know Before You Owe
In 2011, the CFPB began the “Know Before You Owe” initiative. This effort combined the existing mortgage industry standard disclosures into a simpler and more understandable set of forms for all parties involved in assisting borrowers with obtaining a mortgage. After four years of proposals, comments from the real estate and mortgage industry, and quantitative studies and tests with hundreds of consumers across the country, the CFPB is NOW rolling out the new disclosures and new rules created by the Know Before You Owe initiative. These new rules and disclosures called TILA-RESPA Integrated Disclosure (TRID) are set to take effect on Saturday, October 3rd, 2015. Lenders will then be required to give consumers these new forms and to follow the new rules around the procedures and timing for closing a new home loan.
Benefits of the New Forms and Rules
There are specific benefits to consumers, including:
- The reduction of paperwork and confusion. TRID combines several forms and statutory disclosure requirements into only TWO forms.
- Complicated mortgage loan and real estate terminology has been simplified, helping consumers comprehend the information better.
- Emphasizing the information most important to consumers. The new forms will clearly present the interest rate, monthly payments, and the total closing costs on the first page, not buried deep in the disclosures.
- Information about the costs of taxes and insurance will be presented more clearly, as well as how the interest rate and payments may change in the future, if applicable.
- Highlighting features of the loan that consumers may want to avoid, like pre-payment penalties.
- Making the cost estimates consumers receive for services required to close a mortgage loan more reliable, such as appraisal or pest inspection fees. The rule prohibits increases in charges from lenders, their affiliates, and for services for which the lender does not permit the consumer to shop unless a specific exception applies.
- Requiring that consumers receive the Closing Disclosure at least three business days before closing on the mortgage loan. Presently, consumers often receive this information at closing or only a day or two before closing. The additional time will allow consumers to review the final terms and costs and to compare them to the terms and costs they received in the initial estimate.
Time is on Your Side… Or is it?
In 1965 the Rolling Stones released their classic hit, Time is on My Side. Now, 50 years later, the new Know Before You Owe rules will force buyers to have time, time on their side, to review the Closing Disclosure related to the new mortgage. Mandating that buyers have three days to review their documents is designed to protect the consumer from surprises at the closing table. It also gives them time to consult with their “lawyer or housing counselor” and ask all the questions they might have about the terms of their loan. Most consumers would agree that this mandatory waiting period is a positive step when it comes to protecting consumers from predatory lenders and loan officers.
An important note of caution, though, regarding this three-day waiting period: if the consumer finds something wrong with the Closing Disclosure, such as a closing cost credit that is mysteriously left out or an origination fee that is “accidentally” added, the consumer request that the Closing Disclosure be corrected will potentially add another mandatory three-day waiting period to the close of escrow.
If you’ve recently closed on a mortgage transaction, whether it was a purchase or refinance, you are probably familiar with the fact that changes occur throughout the process of closing a loan, all the way up to the final day the closing docs are drawn up for signing. While frustrating, it is not unusual. Now, with the implementation of the three-day mandatory waiting period and more importantly, the requirement of additional three-day waiting periods, it becomes crucial that every aspect of the contract, loan documents, how the borrower is taking title, etc. be perfect before the final documents are drawn.
“Honey, the movers just drove away… leaving all of our belongings on the sidewalk!”
Today, many purchase transactions carry specific days in which every party involved in the transaction understands to be “set in stone,” and which dictate the exact day the transaction will close. The most common period is 30 days. Ultimately, this closing date affects the movers, those burly human beings who have been contracted to pack up, deliver and un-pack the belongings of the new buyer. In most cases, these movers have other jobs scheduled and need to leave on a specific date in order to be on time. As you can imagine, if a buyer is forced to incur additional 3-day waiting periods, these delays will affect many other parties like contractors, painters, and… movers.
There are many other potentially expensive situations affected by this new waiting period. For example, one of the principals may need to close by a specific date in order to take advantage of the tax breaks on the sale of their current residence. Or one of the principals might be involved in a 1031 tax-deferred exchange. A properly constructed 1031 allows an investor to sell a property, reinvest the proceeds in a new property and to defer all capital gain taxes. The tax-benefits lost due to a late closing could end up costing hundreds of thousands of dollars.
The Silver Lining
While change inevitably brings with it unexpected challenges, I believe these changes are ultimately good for our industry. Information is a good thing. Transparency is a good thing. Accountability is a good thing. I believe the implementation of this new initiative is all of these, and more. Consumers can benefit from TRID by working with an honest and ethical mortgage advisor and a team of professionals who can navigate these new processes and communicate effectively.
At the end of the day, success in the mortgage business boils down to providing creative solutions for our clients, seamless and transparent procedures, and an honest approach to closing a mortgage loan. The ultimate goal is a great customer experience.
Todd Galde | Sr. Mortgage Advisor
Commerce Home Mortgage
925-381-8190 | email@example.com