Changes to the new Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) will take effect October 1, 2015. What does this mean to today’s home buyer?
During the housing market crisis, millions of home buyers took on complicated mortgages without understanding them. Many lost their homes in short sales or foreclosure as a result. The U.S. Consumer Financial Protection Bureau is imposing changes to address these problems. It is their desire to improve the home buyer’s understanding of the mortgage process in order to help prevent the loss of homes to short sales or foreclosure for home buyers. The changes imposed on the closing process will be significant.
Key highlights of the changes as of October 1, 2015:
2 New Forms
The Good Faith Estimate, Truth-In-Lending Document and HUD-1 Settlement Statement will be replaced as part of the changes established by the Consumer Financial Protection Bureau (CFPB) in accordance with the Dodd-Frank Act. Home buyers will see two new forms: loan estimate form and closing disclosure form.
The new loan estimate form:
- Summarizes the terms of a mortgage
- Estimates loan fees and closing costs
- Clearly states the loan terms and estimated closing costs
- Explains what the loan terms and estimated closing costs are
- More user-friendly
The closing disclosure form:
- More user-friendly
- Easier to read
- Provides a detailed account of the whole real estate transaction, from beginning to end, including loan terms, fees and closing costs
The new documents are designed to make comparing loan options and understanding changes that may occur between the time they applied for a loan and the settlement easier for home buyers.
This is a dramatic and significant change to the old way transactions have been handled. Again, the CFPB’s goal is to make closing easier for home buyers. Make It Easier for Consumers
New 3-Day Rule
Home buyers applying for a home loan after October 1, 2015, will be given three days to review paperwork and ask questions instead of rushing through closing without understanding what is going on in the closing process. This rule is a good one. It is the biggest change to mortgage closings and will have the greatest impact on home buyers.
The 3-day rule gives borrowers ample opportunity to thoroughly read the loan terms and closing documents and avoid surprises at the closing table. If they don’t understand something, they will have plenty of time to call their real estate agent, lender or title company and ask for an explanation.
- Lenders must provide a loan estimate to borrowers within three business days after they apply for a mortgage.
- Lenders must provide a closing document three business days prior to closing.
While an official loan estimate is only generated after a loan application for a specific property is made, lenders can generate a “fees worksheet” or similar document to help borrowers prepare for their cash needs at the closing during a preapproval process.
Requiring lenders to provide a loan estimate to borrowers within three business days after they apply for a mortgage redefines what goes into a loan application. A loan application requires the borrowers’ names, the borrowers’ income, the borrowers’ Social Security number, the property address, the estimated value of the property and the loan amount. Once the lender has that information, they have three business days to generate a loan estimate. Then the borrowers must sign an Intent To Proceed form to start the normal underwriting process.
Lenders cannot charge any fees except for a credit report and cannot require verification of any information from the borrowers before a loan estimate is generated and the Intent to Proceed form is signed.
Nothing else can be done and no other fees can be charged until the borrowers sign that Intent To Proceed form. The consumers can shop around during that 10-day period for other loans and use the loan estimate form as a comparison tool.
The new CFPB rule requirements will cause lenders and title companies to work in coordination with each other even though lenders are ultimately held responsible for meeting the standards of the regulation.
Until October 1, 2015, title companies prepared and delivered closing documents to borrowers. Now lenders are being held responsible for meeting the deadline. Lenders are typically taking on the preparation themselves.
These changes should be great for home buyers. They are going to make home buyers feel more confident about understanding their loan terms. However, while the responsibility of implementing these changes falls on lenders and title companies, consumers should be prepared for possible delays. Delays in settlements are to be expected until hiccups are worked out. Home buyers can take the following steps to avoid settlement delays:
- Be aware of the big changes that will take effect October 1, 2015
- Work with a lender and a title company who are well aware of and knowledgeable of the big changes
- Realize what a great opportunity these big changes are for today’s home buyer. They are providing plenty of time to read and understand loan terms and closing documents
- Review documents right away
- Compare documents to the loan estimate. Make sure they match. Catching errors soon will help avoid significant delays in the closing process
- Ask questions. Rely on the lender and real estate agent for help with understanding the documents
Here’s one more thing to consider regarding title insurance. Protecting the equity in a property is important. Title insurance protects the lender in case of a title dispute in the future. Homeowners are usually advised to purchase their own title insurance for protection of the investment they have in their home.
The new forms shared by the National Association of Insurance Commissioners and title companies use the term “optional” in reference to the purchase of owner’s title insurance. See this example. Purchasing title insurance has always been optional, but some fear putting “optional” right on the disclosure form may encourage consumers to disregard and pass over it.
Some believe stating “recommended but optional” on the new forms would better encourage consumers to purchase title insurance.
Purchasing a home is the largest transaction in a person’s lifetime, both emotionally and financially. It’s important that consumers educate themselves on the home-buying process. Visit the CFPB site and learn as much as possible about these big changes coming to the closing process on October 1, 2015.
Feel free to contact Charles D’Alessandro, your Brooklyn Real Estate Agent of Fillmore Real Estate in Brooklyn. Get answers to the questions you may have regarding these big changes coming to the closing process on October 1, 2015. Call (718) 253-9700 ext. 206 or email [email protected].