Beginning Aug. 1, new rules could go into effect that impact every person who applies for a mortgage. The Consumer Finance Protection Bureau’s (CFPB) new “Know Before You Owe” mortgage forms and rules are intended to eliminate redundant and overlapping information in lender-required disclosures. CFPB says the new disclosures will help consumers better understand their options, choose the mortgage that is best for them and avoid costly surprises at the closing table.
Under the Dodd Frank Act, four documents will be merged into two. The Good Faith Estimate and Truth in Lending disclosures will be eliminated and combined into a new single Loan Estimate (LE) form. In addition, the Truth in Lending Disclosure and HUD-1 Settlement Statement are being replaced by the Closing Disclosure (CD).
The new rules are intended to streamline the loan application process and make it easier for consumers to understand by clearly spelling out the most relevant details all on one page: the interest rate of the mortgage loan, the amount of the monthly payments and a list of all closing costs.
(CFPB is proposing to delay the new Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure regulations until Oct. 1.)
More clarity
How does this affect borrowers?
First, the Loan Estimate must be delivered to the prospective buyer no later than three business days after receiving the application.
Currently, the HUD-1 Settlement Statement can be presented to the buyer on the day of closing and any changes to the statement can take place during the loan closing.
Under the new rules, the biggest change is that the Closing Disclosure must be provided to the consumer three days prior to the closing, and if there are changes during that 72-hour period, the closing could be delayed.
While the rules are intended to make the mortgage process simpler for consumers, lenders complain that the new rules represent a significant change in the mortgage process, making the mortgage process more complicated for them. Clearly, there’s a lot of anxiety among lenders in advance of implementation, but once the rules take effect, lenders will adapt. The CFPB has given a generous 20 months for lenders to adapt and implement new compliance programs.
Looking ahead, the biggest problem with the new rules is the requirement that the new Closing Disclosure form be presented to the borrower three days prior to closing. Lenders claim they may not have every detail completed for the final disclosure. This may necessitate re-disclosure, sending another form to borrowers, adding another three days to loan process. (Or lenders could simply adapt to the new rules by modifying their in-house process and educate agents and consumers about changes to the loan process.)
Only time will tell whether the new forms actually achieve the goal of bringing clarity to the mortgage process for consumers.
For more information, go to the Consumer Finance Protection Bureau website: www.consumerfinance.gov/knowbeforeyouowe.
Reverse mortgages
There are also new, tougher rules on reverse mortgages that took effect last April.
Reverse mortgages are expensive and controversial. In recent years, there have been complaints over problems with reverse mortgages, including high costs, aggressive marketing techniques and the danger of default if insurance and property taxes aren’t paid on time.
Elderly borrowers now need to pass a financial assessment before they can take out a reverse mortgage. The new financial assessment rule, which applies to reverse mortgage loans, requires borrowers to demonstrate the ability to pay property taxes and insurance premiums on the property. Borrowers who don’t meet the financial requirements for the loan have the option of setting aside money from the loan to pay the property taxes and insurance premiums.
The new rules are meant to prevent loan defaults, but they will make it much more difficult to get a reverse mortgage.
Start early
Whether you plan to buy a home or refinance your current mortgage, you need get your finances in order sooner and be prepared to provide documentation of income, assets, tax returns and more.
The best advice I can offer consumers is start early. Buyers must pursue pre-approval from a lender before looking for a home if they want to be competitive in today’s frenzied real estate market.
The first step: Before you go house-hunting, engage a Realtor in the process. Your Realtor can guide you to lenders with whom they have experience so you can get started on the mortgage pre-approval process.
RAY AKERS is a licensed Realtor for Lake & Co. Real Estate in Seattle. Send your questions to ray@akerscargill.com or call (206) 722-4444.