As real estate agents, we are all aware of the challenges associated with ensuring a smooth transaction for our clients. The Consumer Financial Protection Bureau’s (CFPB) recently implemented changes that may make closings more complicated.
Effective October 3, 2015 “Know Before You Owe” mortgage forms will replace the existing federal disclosure forms. The old Truth-in-Lending Statement, Good Faith Estimate and HUD-1 settlement statement are gone, and the new loan estimate, closing disclosure is coming.
Wondering how the changes will affect you as a real estate agent? Let’s take a look at the old, the new and what is in it for you.
Current mortgage lending process
Currently mortgage lenders are required to deliver two different disclosures to consumers. The Truth-in-Lending Statement and the Good Faith Estimate must be delivered to the consumer within three business days of receiving a mortgage application.
Federal law also requires lenders to give consumers the final Truth-in-Lending Statement (with updates since the original one) and the HUD-1 settlement statement at closing. Delivery of the HUD-1 has not provided the consumer enough time to review the forms and compare with the original estimates.
New process effective October 3, 2015
Consumers will receive the Loan Estimate form within three business days after submitting a loan application. This form will contain information about loan terms, projected payments, closing costs, and a comparison section to evaluate this loan against other loans. The closing costs section is divided into ‘Services you cannot shop for’ and Services you can shop for.’
Services that you can shop for include items like pest inspection fee, survey fee, lender’s title policy and title search fee. The consumer can then comparison shop for the items listed under the ‘Services you can shop for’ section.
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Consumers will receive the ‘Closing Disclosure’ form three business days before consummation. Consummation is the point in time when your buyer becomes contractually obligated to the creditor on the loan under state law. Consummation happens at closing in most cases. This ‘closing disclosure’ allows the consumer to ensure that they are getting the mortgage they signed up for.
The consumer can review the final loan terms in a pressure free environment rather than at the closing table. The three days also allows consumers to ask questions and negotiate any changes that may have occurred. The lenders cannot impose new or higher fees unless without a valid reason.
Lenders are required to deliver a new Closing Disclosure in the following situations – lender makes modifications that result in changes in the Annual percentage rate (APR) by 1/8 of 1 percent in either direction, an addition of a pre-payment penalty or a change in the loan product. The three business day rule applies any time a new ‘Closing Disclosure’ is issued.
CFPB said the new changes are an “important step toward the consumer having greater control over the loan process.”
What can I do to ensure a smooth closing?
Selling agents
Lenders are required to give the ‘Loan Estimate’ three business days after a mortgage application is received. Follow up with your buyer and ensure that they review, sign and return the Loan Estimate form. Business days are defined as Monday through Saturday except if it falls on a federal holiday. It is important for your buyer to know that signing the form does not obligate them to continue with the loan process.
Lenders, as noted before, are required to deliver the ‘Closing Disclosure’ three business days prior to consummation. Lenders are required to add an additional three business days if the disclosure is send through mail, secure email, overnight etc.
Ensure that your buyer reviews, compares, signs and returns the Closing Disclosure right away. Lender will need to be notified immediately if changes need to be made. There could be delays in closing if your buyer requires modifications to the loan.
Listing agents
It is important to educate the seller about the CFPB changes so that they are prepared for possible delays. The closing date may get pushed back depending on the loan modifications initiated either by the lender or the buyer. Allow for enough time in the contract for any possible changes, a 45 day closing time instead of the normal the 30 to 35 days is advisable. Stay in constant communication with the title company, selling agent and the lender to ensure a smooth closing.
There are challenges associated with the implementation of any new procedure or policy. However, a prudent real estate agent by staying on top of things can ensure that the transaction is brought to a successful completion. As always, it is important to communicate, communicate and over communicate with all parties involved.
Jacob Joseph is a real estate professional and entrepreneur in Houston, specializing software engineering and finance.
