Published: Sept 30, 2015 5:00 a.m. ET
CFPB’s “Know Before You Owe” gives consumers more time to review loan documents
After being delayed all summer, a new rule from the Consumer Financial Protection Bureau will go into effect on Oct. 3 that will require banks to give consumers more time to review loan documents. But lenders are still warning that the new rules could slow down the time needed to close by at least a week — and won’t sort itself out for several months.
Here’s what’s happening: The federal government requires that as of Oct. 3 loan disclosure documents must combine the information required in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Under the new rule change, known as the “Know Before You Owe” rule, or the TILA-RESPA Integrated Disclosure (TRID) regulation, consumers must be given the new combined Loan Estimate (LE) with all the charges, fees and line items three days before the closing, rather than at the closing on the HUD-1 form, which itself will disappear.
“Giving you three business days to review your closing disclosure before you sign on the dotted line is designed to protect you from surprises at the closing table,” the CFBP said in a press release announcing the rule. The rule was supposed to go into effect on Aug. 1 but was delayed after an outcry from lenders and members of Congress who said it would hurt closing times at the height of the real estate sales season.
Closings may take a week more than usual, which could hurt home buyers who are depending on financing to come through quickly to have a chance against all-cash buyers, said Benjamin Niernberg, executive vice president of business development with Proper Title LLC, a title insurance company in Northbrook, Ill. “It can push the closing six days out, but we’re talking about business days, so if it falls on a weekend, it could be even longer,” he said.The new rules have been in the works since November 2013.
Joe Parsons, a senior loan officer at mortgage lender PFS Funding in Dublin, Calif., is even more pessimistic, saying TRID will likely delay closings as much as two weeks initially, and the delays will continue for the rest of the year. “It’s going to take about three months before everybody gets comfortable with this,” he said.
The new rules come as home sales, which in August fell to the lowest level in five months, are still running 6.1% over year-ago levels, according to the National Association of Realtors, indicating a step-up in purchases in 2015 over a year ago.
Consumers benefit from the rule changes because any change in the loan estimate that’s more than one-eighth of a percent (12.5 basis points) in the three-day period for a fixed-rate loan or a quarter of a percent (25 basis points) for a variable rate loan — or changes or additions in other fees, such as an addition of a prepayment penalty, requires an entirely new disclosure period. However, a decrease in the interest rate or fees won’t cause a delay.
The CFPB’s change comes as a result of years of documented abuses that occurred during the real estate boom in the past decade, as buyers came to closing unaware of the blizzard of documents they’d be signing, which made it all too easy for unscrupulous lenders, brokers or title companies to stick hidden fees in the closing documents or change the loan rates at the last minute.
The CFPB says the new rule “gives you time to consult with your lawyer or housing counselor and ask all the questions you might have about the terms of your mortgage.” The CFPB was created as an independent government agency in 2011 in response to the financial crisis and Great Recession of 2008.
But many questions remain, not only about how details on the new changes will be handled, but whether lenders will be sanctioned for even inadvertent mistakes as they get up to speed. “Lenders will slow-walk every new mortgage to ensure there is not a disclosure mistake as even innocent errors can give borrowers extraordinary rights, including the ability to undo the loan,” Jaret Seiberg, a banking analyst with Guggenheim Partners in Washington, D.C., said in a research report.
More than 300 members of Congress pushed CFPB Director Richard Cordray to delay enforcement of the rule until the end of 2015 and the Mortgage Bankers Association (MBA), a lender trade group, wants that pushed out even further, till as late as February 2016. “A temporary legal safe harbor for lenders will ensure the new requirements are implemented in an orderly manner and that consumers are not confused or, worse yet, impaired in their ability to purchase a home or refinance a loan,” MBA said on Sept.4, in a statement.
One pressing question is what might happen when delays in closings that aren’t the fault of the borrower push them beyond an agreed-to 30-day rate lock for loan interest rates. Holden Lewis, a mortgage analyst for Bankrate.com, says borrowers should look for rate locks that are good for 45 days or up to 60 days, in case the home can’t close in 30 days or less.
“I would like to think that banks will honor the (rate lock agreements), but it will come down to the individual bank,” said Michael McPartland, managing director and head of investment finance with Citi Private Bank in New York. “If the consumer does everything right, it would be my expectation that banks would look for ways to keep the agreement if the rate lock was in danger.”
Parsons of PFS Funding says if a delay occurs because the lender wasn’t ready to close because of the TRID requirements, he’ll absorb the $200 to $1,000 or so it might cost to extend a rate lock, but he concedes that not everyone will do the same.
Angela Hernandez, a loan officer with FirstBank Florida in Miami, expects that consumers will have to re-lock and could potentially pay higher interest rates if the closing occurs outside the rate-lock period. “The borrower is going to take the hit, not the banks,” she said.
As such, McPartland, Parsons and Hernandez urge borrowers to get bank statements, W-2s and pay stubs to their lenders even earlier in order to close on time starting Oct. 3. “It might pay to be on top of your loan officer a little more than you might otherwise,” McPartland said.
Companies that prepared for TRID will be able to take market share from those who haven’t, and will be able to help borrowers close on time, said Rob Chrisman, a former mortgage officer in San Rafael, Calif., who runs a blog about lending. Consumers should ask their loan officers whether they’re prepared for TRID and if not, consider switching to a better-prepared lender so they can close on time. “One can’t say that the industry has not had enough warning,” he said.