If you are in the market to buy a new home after August 1, 2015, or if you are one of the other stakeholders involved in the home buying process: seller, realtor, lender, appraiser, attorney, or title company –brace yourself – because the process, and several key documents the industry has used for over three decades to finance and settle a purchase are changing.
As a result of the financial crisis of 2008 and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a special agency was created to oversee consumer safety with respect to financial transactions. That agency is the Consumer Finance Protection Bureau (CFPB).
OK, so what exactly are “LEAP” and “TRID”? These are acronyms for the new process and the new disclosures. “LEAP” stands for “Loan Estimate Application Procedure” and “TRID” means “TILA-RESPA Integrated Mortgage Disclosures”. These apply to closed-ended consumer credit transactions secured by real property. Excluded are reverse mortgages, home equity credit lines, chattel secured/mobile home only loans, and lenders who originate less than 5 loans a year.
During a two year study, the CFPB found that one of the issues contributing to the crisis was that home buyers applying for a mortgage were often confused by the documents presented to them. At the beginning of the loan application process there is the “GFE” (Good Faith Estimate) and the “TIL” (Truth–In-Lending) disclosure, and at closing, the “Final TIL” and “HUD1 Settlement Statement”.
Industry studies showed a correlation between borrower confusion and the adoption of higher risk mortgage loans in the years leading up to the crisis. These four disclosures are going away and being replaced by the “Loan Estimate” and the “Closing Disclosure”. You can see these new forms and read about the study online at: http://www.consumerfinance.gov/knowbeforeyouowe.
The new forms are designed to be easier to read and highlight key information. This makes them easier to understand and to comparison shop. The “Loan Estimate” like its predecessor the “GFE and TIL,” has to be provided to the borrower within 3 days of receipt of an application. The borrower has to acknowledge his/her intent to proceed with this particular lender before the lender can continue further.
The “Closing Disclosure” now has a 3 business day mandatory “review period” which starts upon receipt of the form by the borrower. This is designed to give the borrower more time to review the closing figures in an “unpressured environment”, before signing loan documents and to eliminate surprises at closing. However, depending upon the method of delivery (by hand, US mail, email or fax) that could potentially add an additional 3-10 calendar days (“delivery time period”) to the process, as we wait for the borrower to acknowledge receipt of the disclosure before closing. If there is a change in circumstance, such as an increase in the APR greater than 1/8%, or a change in the loan program, or the addition of a pre-payment penalty, a new disclosure must be issued with a new waiting period.
It is reported that Wells Fargo has announced that they will complete and deliver the Closing Disclosure via US mail. That means the completed disclosure (with buyer and seller figures) has to be mailed about 10 days prior to closing to meet the 3 day rule. Of course this means their closings need to be scheduled far in advance.
The new “rule” also adopts a ‘zero tolerance’ for increases in third party fees for services that the buyer is not allowed to choose such as the appraisal of the property. Lenders are prohibited from passing those increases on to the borrower. That is why it is so important to provide as much information to the lender about the property up front. (Ie., is it a single family home or does it have an accessory unit that makes it really a two-unit? Appraisal fees for multi-unit properties are higher than for single units.)
So why is it such a big deal to change a few forms? (1) This is a really huge project for the providers of loan origination software (LOS) and closing documents because they have to re-write and program the software that produces the loan and closing forms. (2) Attorneys and title agents who don’t currently have this settlement software will need to purchase it and learn how to use it. (3) The new process involves significant coordination between lenders, title companies and attorneys who provide escrow and settlement services as there may be a shifting or sharing of duties regarding disclosure of title insurance and a different formula for calculating simultaneous policy issues. (4) Once programs are released, there is training of staff, testing the software, changing operational procedures, and notifying our real estate partners of those changes in order to be ready for August 1st.
And how does all this affect sellers and buyers of real estate? Expect longer settlement times as buyers opt to avail themselves of their right to a longer discovery period. Tax and fuel pro-rations will likely have to be agreed upon using a date other than “as of the day of closing” since those numbers have to be provided to settlement agents at least a week earlier. Sellers should continue to provide complete, current, and accurate information on their properties to listing realtors so that inspectors and appraisers can file their reports expeditiously. Attorneys may even need to consider starting the title search earlier on in the purchase process, regardless of a final “clear to close” from the lender, as many title companies currently do, to shorten the time on the end.
As with all types of change, learning to manage it can be difficult. Accepting it is the first step. Dodd Frank legislation is aimed at encouraging consumers to take charge of the process, educate themselves and “Know Before they Owe”*, but besides that, what the CFPB is asking us all to do is to take pause…, to slow things down and make the time to consider wisely, what will likely be the biggest financial transaction in our lives.
Useful CFPB links:
*1. “Know Before You Owe” http://www.consumerfinance.gov/knowbeforeyouowe/
2. “Your home loan toolkit/A step-by-step guide”
3. “What the new simplified mortgage disclosures mean for consumers”
4. “Mortgage Closings today” A preliminary look at the role of technology in improving the closing process for consumers http://files.consumerfinance.gov/f/201404_cfpb_report_mortgage-closings-today.pdf
Helen Wachtel, Assistant Vice President & Senior Mortgage Officer
Brattleboro Savings & Loan is an Equal Housing Lender