Turbulent Waters Ahead for Real Estate and Mortgage Industry - Ne

[Tracy Stein]

The rules are changing for mortgage lenders. The consumer Financial Protection Bureau (cFPB) is replacing some of the forms used at closing and requiring lenders to provide these forms at least three days before closing. The motivation for these changes is to streamline the closing process, reduce the mountain of documents and improve the borrower's understanding of the fees. Like all new regulations, this one has its pros and cons. These changes will affect buyers, sellers, mortgage brokers, lenders, real estate agents/brokers, and title companies as well.

The New Forms

The new rules replace the Good Faith Estimate, HUD-1 Settlement Statement and Truth in Lending Act Disclosure Form with the closing Disclosure and the Loan Estimate. They must be available three-days before closing. The new forms will highlight interest rate, monthly payments and the total closing costs on the front page. The forms will also provide more details regarding the costs of insurance, taxes, appraisals and pest inspections, as well as how payments and rates may change over time. In addition, the forms will let borrowers know about unfavorable features, such as prepayment penalties or increases in the loan balance.

The new rule requires specific mathematical computations to disclose the borrower's and lender’s title insurance fees. The three-day review period is measured from the time the borrower receives the forms. However, absent a mechanism to record such receipt, a three-day delivery period is assumed, meaning that the lender must send out the forms at least six days ahead of the closing.

Revised forms will have to be sent out when there is:

• An APR Increase greater than 1/8 percent
• A change in the loan, such as fixed rate to adjustable
• A pre-payment penalty added after the initial disclosure

Pros

1. The new forms should be easier to understand, convey new information and won't be so overwhelming.
2. Borrowers will have more time to read the documents and ask questions.
3. Borrowers taking an adjustable-rate, balloon or interest-only loan will see best- and worst-case examples disclosing how the payments and rate could change over the loan period.
4. Borrowers are protected from material, undisclosed last-minute changes to the deal.
5. Closings dates may be pushed back. The new rules will probably require an extra 15 days to close on a home. That is, 30-day contracts will now take 45 days, and 60-day contracts will necessitate 75 days. closings might take no less than 60 days even when the transaction is all-cash.
6. Changes at closing will be difficult or impossible to make without imposing another 3-day review period. For a homebuyer with a moving truck loaded and ready to roll, this would be a real headache.
7. Delays at the close could have other negative consequences to the borrower, such as the lapse of a rate lock or the loss of certain tax breaks.
8. The new forms disclose the full title insurance premium, which could be misleading because the premium is often discounted.
9. Line numbers have been omitted from the new forms. While not a big thing, it makes it a little harder to precisely point to a piece of data under discussion.

Cons

One hopes that the changes prove beneficial to mortgage borrowers. However, we will have to reserve judgement until we see the ripple effects that accompany the new rules.