New mortgage rules are now in place to help future homeowners better understand what they are signing up for. But industry participants are concerned there may be some delays in closings going forward.
On Oct. 3, the Know Before You Owe mortgage disclosure rule, mandated by the sweeping Dodd-Frank Act enacted after last decade’s financial meltdown, was put in place. Among the changes are a standardized loan estimate form to help in selecting a mortgage, and a closing disclosure form given to the borrower three days before closing to better understand the terms of the loan.
Both forms were created by the U.S. Consumer Financial Protection Bureau, also created as part of Dodd-Frank.
“In essence, what we have done is to replace four overlapping mortgage disclosure forms and put in their place just two forms that consumers have told us are much easier to understand,” said Richard Cordray, director of the CFPB, in a speech before the National Association of Realtors last month.
We want to encourage consumers to focus on ‘shopping for a mortgage’ instead of just ‘getting a mortgage
Richard Cordray, Director, Consumer Financial Protection Bureau
The change in forms has caused the mortgage industry to reprogram its systems, and some lenders are not ready, said David Motley, president of Colonial Savings in Fort Worth, who was recently named vice chairman of the Mortgage Bankers Association.
And while the new documents are a good idea and consumer friendly, the waiting period may delay closings during the current hot market, Motley said.
“If the borrower can’t do a face-to-face meeting and pick up the closing disclosure or receive it electronically, we have to mail it, and build in another three days on top of the three-day waiting period,” he said. “We can still do deals quickly, but it could get really sticky.”
Judith O Smith, vice president at Cendera Funding in Fort Worth, said there was a flurry of activity last week before the new rules took effect, but added that the new documents are easier to read.
She is concerned that deals that involve simultaneous closings — some involving as many as five houses — won’t be able to happen in a single day anymore with the required waiting period.
“If somebody falls off of that five-house train, it clogs up everything,” she said.
If the closing document shows the loan has changed substantially — as in the type of loan (fixed to adjustable rate,) annual percentage rate or prepayment penalty — consumers must be given a revised closing disclosure at least three more days before the closing.
Cordray said the potential delay is important for consumers to understand one of the largest purchases they will make in a lifetime.
“Our research found that, prior to this rule, consumers felt there wasn’t enough time to review their documents. So the rule gives you time to ensure you feel comfortable before you sign on the dotted line for your mortgage,” he said.
The closing disclosure summarizes the final loan terms and costs, including the loan amount, monthly payments, taxes, insurance, other property costs and total cash required to close the loan. It also presents a detailed accounting of the payments and fees. Borrowers can compare this form to their loan estimate to see what has changed.
“Our form makes that comparison very obvious, which minimizes the potential for nasty surprises such as ‘bait-and-switch’ increases in rates, fees or settlement costs,” Cordray said.
The other new form, the loan estimate, provides a summary of the loan offered along with the estimated costs associated with the mortgage such as taxes and insurance and closing expenses. Lenders are required to submit this form to the potential borrower within three days of their application. Using a standardized form makes it easier to compare offers, Cordray said.
“We want to encourage consumers to focus on ‘shopping for a mortgage’ instead of just ‘getting a mortgage,’ ” Cordray said. “Consumers have much more power than they realize to shop for the best deal.”
To avoid delays, Motley recommends that consumers prequalify and have all of their financial documentation — including tax filings and W-2 forms — at the ready before they start shopping for a home.
While the new forms make shopping and closing on a mortgage easier for consumers, they will still face the huge, complex document at closing that requires many initials and signatures.
“We are well aware that the sheer volume of the documents can be overwhelming to people who are generally unfamiliar with the process,” Cordray said.
To address that problem, the CFPB recently conducted a pilot project which found that those who closed their mortgage using an electronic platform showed higher measures of understanding, efficiency, and empowerment than borrowers who used only paper forms, Cordray said. Based on those results, the agency is strongly encouraging further industry action and innovation around “e-closings.”
For more information and a step-by-step guide to understanding home mortgages, go to www.consumerfinance.gov
Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net