Changes implemented by the Consumer Financial Protection Bureau (CFPB) to address major problems that surfaced after the housing market meltdown in 2008 will become law on August 1, 2015. Published by the US government in late 2013, the new regulations dramatically affect the requirements for mortgage disclosures.
While designed to make processes simpler, easier and more accessible for borrowers, the new rules and regulations have far reaching implications for the industry. As a result, creditors, mortgage brokers, and settlement agents have had to make extensive revisions to applicable software, and from August 1, they will all have to change the way they do business and share information.
Issues that need to be addressed, by those involved in buying and selling real estate, include new forms with terminology that has been adapted to standardize the system and make it less confusing. While this will ultimately make the process easier, staff must be retrained, and it might take people some time to adapt.
A primary role of the CFPB as always been to prevent predatory mortgage lending and at the same time make it easier for consumers to fully comprehend the terms of their mortgage loan before they finalize it. Further, the Bureau is there to protect the public from business “sharks” that might use loopholes in the law to make more money than they should. The new regulations have been designed to ensure that effective protection is provided.
How Closings Will Be Affected by the New Regulations
For more than three decades, most closed-end residential loans have required four disclosure documents, all of which are going to be removed from the new requirements. From August 1, 2015 (and not before), all closed-end credit transactions that are secured by “real property” will utilize just two forms:
- A loan estimate form
- A closing disclosure form
Both new forms are written in clear, consistent language, and they have been designed to make it easier for consumers to find all the key information they need, particularly that relating to interest rates, monthly payments, and the costs that will be required to close the loan. Buyers should be able to use the new forms to gauge whether or not they can afford the loan, and compare different loan offers.
The existing forms that are about to become obsolete are:
- The Good Faith Estimate (GFE) that currently lists basic information about mortgage loans and its terms, that was development under the Real Estate Settlement Procedures Act (RESPA)
- The Truth-in-Lending Act (TILA) initial disclosure document that currently supplies vital information including the annual percentage rate (APR), finance charges, and total of payments within three business days of all loan applications
- The TILA final disclosure document
- The HUD-1 Settlement Statement that lists all the charges as well as all the credits due to buyers and sellers in all real estate settlements.
The main problem with the existing documents is that the terminology used is not uniform, and information is overlapping. This is confusing and inefficient for the industry and for consumers.
As mentioned above, from August 1 there will be only two documents, both of which use the same terminology, and which together are dubbed the “know before you owe” disclosure documents. This is in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as the Dodd-Frank Act) that was approved by the Obama administration in 2010. This legislation detailed the procedures that needed to be implemented over a number of years to minimize risk in the US financial system, and in this way protect consumers.
Five years later major changes are about to be implemented, and they are going to affect everyone: real estate agents and realtors, lenders, title agencies, as well as homebuyers and sellers. The new regulations apply to any applications for closed-end credit transactions that will be secured by real property (land) received on or after August 1. They also apply to construction-only loans, as well as loans that are secured by vacant land or by 25 acres or more.
However, they do not apply to reverse mortgages or mortgages that are secured by mobile homes or dwellings that are not attached to land, or to Home Equity Line of Credit (HELOC) where a borrower’s home is used as collateral. Loans that are made by a creditor that makes five or less mortgage loans in a year are also not covered.
New Loan Estimates
For loan estimates, a new three-page form will replace the GFE and initial TIL forms. It is similar to the two old forms in terms of content, with some significant additions, and provides for both a good-faith estimate of credit costs and transaction terms. However, the hope is that by having just one form, instead of the two that currently have such disparate terminology, it will be a lot less confusing when consumers looking to buy real estate are shopping for a loan.
The new loan estimate form has been carefully designed to help consumers understand key features, as well as the costs and risks of the mortgage loans they apply for. Several tables have been incorporated, including a loan terms table, a projected payments table, a costs at closing table, as well as adjustable payments (AP) and adjustable interest rate (AIR) tables. There are also tables with comparisons to further simplify understanding of loan estimates.
Prepayment Penalties
One important addition is the disclosure required for prepayment penalties. If there are prepayment penalties, and the lender is obliged to disclose the maximum amount that could be levied, as well as when the penalty period comes to an end. There must also be guidance for consumers on how these penalties are calculated.
There are additional rule changes that lenders need to take into consideration when implementing the new disclosures, including the consumers’ ability to repay loans.
The Application for a Mortgage Loan
This new form must be given to buyers no more than three business days after their loan application has been received. In this regard, a business day is specifically when the creditor’s offices are open.
Information required to “complete” an application is specified in the regulations, and relates to the applicant, the property to be purchased, and the loan required. It is legally complete once applicants have provided:
- Their name, income and social security number so a credit report can be obtained
- The address or lot number of the property, including the zip code, and an estimate of its value
- The amount of the mortgage loan wanted
Once the creditor has this information, a loan estimate may be provided. If the creditor cannot approve the loan, or if the buyer withdraws the application within the three business day period, the loan estimate does not have to be supplied.
Previously, there was a clause that allowed the creditor to call for “any other information deemed necessary by the loan originator.” The removal of this clause was seen to be in the best interests of consumers, largely because of consistency that would allow them to “compare apples with apples” when shopping for a mortgage loan. It does not though prevent lenders from calling for addition information needed to provide a reliable estimate, although it might affect the start of the mandatory three-day period.
The creditor is also responsible for ensuring that the loan estimate is delivered (or mailed) no later than the seventh business day before consummation of the transaction takes place. This obligation has not changed.
There are various types of loans that may be applied for, over different terms which, when applied for should be described in whole years plus any additional months. Specific loan types are:
- Purchase if the loan will finance the acquisition (purchase) of the property
- Refinance if it is to refinance an existing obligation secured by the property
- Construction if the loan will be used to finance building of a home on the property
- Home equity loan if it is to be used for another purpose
If circumstances change after an application has been made, and the loan estimate provided, creditors have an additional three business days to revise the estimate. Generally a loan estimate should be provided no later than seven business days before consummation, which is usually the day on which the final paperwork is signed, though not legally the same as settlement or closing. Legally, consummation is the point in time when the buyer becomes contractually obligated to the creditor on the loan under applicable State law.
The requirement that buyers may waive or modify the seven-day waiting period if there is a genuine personal financial emergency that requires consummation sooner, remains the same. For example, this may happen if there is a foreclosure sale that cannot proceed without the loan.
What “Good Faith” Means
Banks and other creditors are responsible for ensuring that loan estimates are made “in good faith” and are consistent with the information supplied by those seeking loans. Generally, if charges on the closing disclosure document are higher than those on the loan estimate, the loan estimate is considered “not in good faith.” Creditors may, though, charge less than the amount on the loan estimate.
Nevertheless, there are acceptable circumstances when creditors are allowed to charge more than quoted on the loan estimate form. These include certain costs including prepaid interest, property insurance premiums, and charges paid to third-party providers for services that are not required by the bank. They may also charge more if the amount falls within explicit tolerance thresholds that are specified in the regulations. For instance, charges for third-party services and recording fees are subject to a 10 percent cumulative tolerance. On the other hand, transfer taxes, and fees paid to the creditor, mortgage broker or their affiliates, are subject to zero tolerance charges.
If consumers are charged (and they pay) more than the amounts on the loan estimate in excess of the applicable tolerance threshold, creditors are bound to refund the excess within 60 calendar days after consummation.
Consumers should also be aware that creditors are not permitted to issue revisions to loan estimates if they discover errors, miscalculations or underestimated charges. The only exceptions to this rule are certain “changed circumstances” that occur after the loan estimate has been provided; if the interest rate was not locked at the time; if the borrower requests revisions to credit terms; if the borrower takes more than 10 days to indicate an intention to proceed with the loan; or in the event of a new construction loan, if settlement is delayed by more than 60 calendar days, and the loan estimate states that revised disclosures may be issued in this circumstance.
Projected Payments and Closing Costs
All loan estimates must include a breakdown of payments, including interest and insurance. Closing costs breakdowns must also be detailed. While this was previously required, loan costs have been organized into new categories: origination charges, as well as both services you can and cannot shop for. Additionally, lenders need to detail “other costs” and calculate total closing costs.
The new loan estimate must also disclose the estimated total of payments five years into the loan term. It needs to show the total a buyer will have paid in principal, interest, mortgage insurance, and loan costs, as well as the principle sum that will have been paid off within this period. The current TIL disclosure only shows the total finance charge and payments over the full term of the loan.
Another new disclosure is the need for creditors to reveal the total interest percentage (TIP) – which is the total interest those taking out loans will pay over the loan term.
Closing Disclosures
From August 1, a new closing disclosure document will be used to finalize the deal. Once the buyer has found a home, signed the contract, and has been approved for the loan, this document will be used to provide the buyer with all the information about loan and settlement costs. This new document replaces the old HUD-1 and final TIL documents, and has been designed to provide disclosures that will enable consumers to understand all the costs that apply to the real estate transaction. Like the new loan estimates form, it incorporates a number of tables.
This form must be given to buyers, by the creditor or by a settlement agent, no later than three business days before consummation of the loan. A vital factor is that the buyer must have this document at least three business days before consummation, to give them ample time to review it. So if the document is to be mailed or sent via courier, it is a legal requirement that additional days are added, and it is the lender’s responsibility to do this. This would also mean that the in-hand date is different to the closing date. In the event of mailed documents, the timeline would probably be six business days prior to consummation.
Whereas business days relating to loan estimates are those days when the creditor or bank is open to the public for business, the business days prior to consummation are considered to be all calendar days except Sundays and legal public holidays.
New Restrictions and Prohibitions
A number of new restrictions have been introduced to protect consumers. For instance:
- Fees may not be imposed on potential buyers before they receive the loan estimate and indicate their intent to continue with the transaction. This does not necessarily have to be done in writing.
- Written estimates of costs or terms may not be provided before a loan estimate has been received, unless the potential buyer is informed, in writing, that these might change.
- Lenders may not request documents that verify information related to a mortgage bond application before they have provided the loan estimate.
Records Are Important
It should be a no-brainer that the forms used for recording real estate loan transactions must be kept safe for a certain period of time. But this, too, is covered by the new regulations.
For instance, the bank or other creditor providing the loan must keep copies of the loan estimate for three years, and the closing disclosure documents (together with any other official paperwork) for five years after consummation. Further, the regulations allow but do not insist on electronic recordkeeping. But records MUST be kept, and they must be accurate.
