Last week, the Consumer Finance Protection Bureau (CFPB) announced that the TILA/RESPA Integrated Mortgage Disclosure rule, which has so many in the real estate industry chewing on their fingernails, would now be starting October 1st.
That’s a two-month reprieve for mortgage lenders, real estate agents, real estate attorneys, title and escrow companies. And, they’ll need every minute of it to get up to speed with how the new TILA/RESPA details will play out.
For those of you playing along at home, Federal law requires lenders to provide two different disclosure forms to consumers applying for a mortgage. The law also generally has required two different forms at or shortly before closing on the loan. Two different Federal agencies developed these forms separately, under two Federal statutes: the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA).
According to the CFPB, the information given to borrowers via these forms is “overlapping” and “inconsistent.” The CFPB believes that borrowers “often find the forms confusing, and lenders and settlement agents find the forms burdensome to provide and explain.”
One of my Think Glink Media editors recently closed on a house and when I asked her how she found the HUD-1 form, which is one of the forms that will disappear with the new TILA/RESPA rule, she agreed it was “confusing.”
Here’s how we think the new TILA/RESPA Integrated Mortgage Disclosure (you might also see it referred to as TRID) rule will affect home buyers, home sellers, Realtors, and lenders:
The existing truth-in-lending statement is supposed to be merged with the existing HUD-1 settlement statement. The HUD-1 was designed in the 1970s, and hasn’t had a significant update since. What does this mean for most home buyers? Closing agents, title companies and closing attorneys will now deliver a “Closing Disclosure” to the borrower. The Closing Disclosure is a 5-page form that combines many aspects of the Truth-in-Lending form and the old HUD-1 settlement statement (also affectionately known as the RESPA statement).
In addition to the Closing Disclosure that is given to the borrower and not to the seller, the buyer and seller will sign a Settlement Statement. This new settlement statement has a very different look than the old HUD-1 settlement statement. Since most buyers and sellers found the old HUD-1 form to be fairly incomprehensible, you’d hope that a redesign would make it more clear where the cash is coming from and going to in the closing.
Unfortunately, the new form is unlikely to strike most buyers and sellers as much of an improvement. Most often, borrowers who are unfamiliar with closing documents (including purchase and sale agreements and mortgage docs) aren’t going to find the new Closing Disclosure statement easy to understand.
The Mortgage Disclosure Process
The bad news for many is that once the new law takes effect, the changes to the process of getting a mortgage are significant, especially for those real estate professionals who have been working in the residential side of the business for quite some time.
The government currently requires lenders to provide borrowers with the HUD-1 one day before closing. What typically happens is that the HUD-1 is given to borrowers on the actual day of the closing or late on the day before closing. The attorney for the buyers will sometimes walk the borrowers through the document. There’s almost no time for the borrowers to read and ask questions in order to understand the flow of money before the closing.
The new rules will require lenders to give a borrower three days to review the Closing Disclosure, and that must be at least three days before closing. In other words, about seven days before closing, a lender must send the disclosure to the borrower. The borrower would then have three days to sit and review the disclosure and the closing could occur three days after the end of that first 3-day period.
These dates appear to be fixed. If you must change a closing date or change your interest rate or other material terms in your loan, your closing will have to be pushed out seven days. The question on everyone’s mind is what, exactly a material change to your loan?
The Consumer Finance Protection Bureau (CFPB), which is driving these changes, has laid out a few examples of what shouldn’t require a date change, including unexpected discovering during a walk-through even if they require a seller giving a credit to the buyer, tax and utility prorations, and any typos found in the loan documents.
However, according to the CFPB a new 3-day review period would be required if your loan’s APR rises by more than ⅛ of a percent for fixed-rate loans or by more than ¼ of a percent for variable rate loans, if a prepayment penalty is added to the loan at the last minute, or if you’re switching loan types, from a fixed to an interest-only or an adjustable rate mortgage.
But you can imagine that lenders might be more likely to pull the trigger and re-underwrite loans, knowing that the CFPB is watching to see how its new rules protect consumers. And from the consumer point of view, you can imagine the panic that will set in if your moving truck is outside the doors of your new home and you’re at the closing but the lender tells you that you can’t close for another week because the loan has to go into underwriting again and you need a 3-day review period (plus the three days ahead that the documents have to be mailed to you).
Finally, we can’t go in depth into the changes, but there is a bit of confusion in the industry relating to the impact the change will have on the timing requirements, on the calculation of certain fees (in particular owner’s and lender’s title insurance policies) and whether other last minute changes to the Closing Disclosure would require a new 3-day disclosure period and push out closings at the last minute.
This will play out in real time during thousands of closings that are set for the end of September and into the beginning of October – and that’s what’s making everyone in the real estate business so nervous.
With a bit more breathing room, we’ll all be watching to see what the regulators come up with for October 1.
FOR MORE INFORMATION
For consumers and real estate industry pros: http://files.consumerfinance.gov/f/201506_cfpb_factsheet_will-the-new-mortgage-disclosures-delay-my-closing.pdf
TILA/RESPA timeline information: http://files.consumerfinance.gov/f/201409_cfpb_tila-respa-integration-disclosure-timeline-example.pdf
All the docs posted at the CFPB: http://www.consumerfinance.gov/regulatory-implementation/tila-respa/
9-28-2015 UPDATE: The TRID rule will now take effect October 3.
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