August 17, 2015 by Leave a comment

paperworkIf you’re in the process of looking for a home and you expect to close after October 1, 2015, you may be one of the first to use new mortgage disclosure forms that make it easier to save on closing costs.

Over the past two years, the Consumer Finance Protection Bureau has developed new forms required by the TILA and RESPA acts. TILA-RESPA stands for Truth in Lending Act and Real Estate Settlement Procedures Act, two federal laws that govern real estate transactions. The new forms are designed to reduce paperwork and help consumers better understand their options on closing costs, choose the deal that’s best for them, and avoid costly surprises at the closing table. They replace two different forms that contained duplicative and sometimes overlapping information.

The required loan documentation consists of two new forms: the Loan Estimate and the Closing Disclosure to ensure compliance.

The Loan Estimate. This form must be provided to borrowers within three business days after they submit a loan application. It replaces the early Truth in Lending statement and the Good Faith Estimate, and provides a summary of the key loan terms, including monthly payments and estimated loan, closing costs, title insurance, origination costs, appraisal, recording taxes, and settlement services. Consumers can use this new form to compare the costs and features of different loans.

The Closing Disclosure. This document provides a detailed accounting of the transaction and is sent to borrowers three business days before closing. It replaces the final Truth in Lending statement and the HUD-1 settlement statement.

Though the CFPB conducted more than two years of extensive research, testing, and review to find out how to create mortgage disclosures that do what the law intended them to do, the changes have generated concern and criticism from real estate agents and lenders. Some argue that they haven’t had time to make changes in the software programs they use to prepare the information.

Some of their other concerns are:

Not enough time to verify estimates. “What the CFPB is doing [by mandating the three-business-day deadline] is forcing lenders to give disclosures based on information that is unverified. The problem is that three days after an application is received, the lender doesn’t even know what loan program the borrower belongs in. Further, they don’t even know yet if the income figures the borrower provided are accurate,” says one lender.

The CFPB allows lenders can provide “re-disclosures” to report changes in the initial estimates, but that may negate the value of the three-day disclosure and raise questions about the need for speed.

Lenders have a similar concern with meeting the requirement that the new Closing Disclosure form be received by the borrower no more than three business days prior to the closing.

Major software changes. Lenders rely on loan origination systems or software platforms to underwrite loan sand prepare critical documents like the new closing forms. The new forms require major changes in software, and many lenders have been afraid they will not be ready or able to take loan applications in time for the launch of the new forms.

According to the CFPB’s own estimates, implementing this new process will cost the settlement services industry $67.8 million over the next five years. It will cost lenders $207 million per year for the next five. That brings the total price tag for implementation to more than $1.3 billion.

No last minute negotiations or changes at the closing table. Three days before settlement the lender may not know every detail or final disclosure. Further, the negotiations between seller and buyer may still be open, so how can a lender provide an accurate disclosure? The only answer is to require all negotiations be completed in time to be included in the final Closing Disclosure.

Given the possibility of changes triggering another waiting period or a last-minute change requiring lender approval, Realtors should assume it will take an additional 15 days to complete a closing, say analysts at the National Association of Realtors. That means if closings in your state typically take 30 days, allow 45 days. Over time, as the industry adjusts to the changes, those additional days might no longer be necessary.

With nearly half the mortgage industry unprepared for the original August 1, 2015 start date for the new forms, the CFPB has delayed implementation to give the real estate industry two more months to adjust to the changes.

 

scook@reeconadvisors.com'

Steve Cook is managing editor of Real Estate Economy Watch, which was recognized as one of the two best real estate news sites of 2011 by the National Association of Real Estate Editors. Before he co-founded REEW in 2007, he was vice president of public affairs for the National Association of Realtors. In 2006 and 2007, he was named one of the 100 most influential people in real estate.


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