Home closing forms get a big makeover
Some of the key documents in the mountain of paperwork consumers sign at closing time when they purchase a home are about to get a big makeover.
The changes, which take effect Aug. 1, are being imposed by the U.S. Consumer Financial Protection Bureau to address problems that surfaced during the meltdown of the housing market when millions of buyers took on complicated loan products they didn't understand and ended up losing their homes in short sales or foreclosure.
At least one of the changes is aimed at giving buyers a little breathing space -- providing them three days to review all the paperwork and ask questions about it rather than rushing through it at settlement, as many currently do.
Anyone who has bought a home in recent years is familiar with the good faith estimate, the truth-in-lending document and the HUD-1 settlement statement. All three of those documents are set to disappear as part of the new rules established by the CFPB in accordance with the Dodd-Frank Act.
"The goal of the CFPB is to make it easier for consumers to understand their loan terms," says Mitchel Kider, chairman and managing partner at Weiner Brodsky Kider PC in Washington. "I think the result will be helpful to consumers but there will be a learning curve for everyone."
Indeed, experts say the changes will force lenders to centralize or regionalize their closing processes. The American Bankers Association said this week it was worried its members wouldn't have the software in place to accommodate the new rule. A survey, it said, showed that more than 20 percent of banks would opt not to offer certain mortgage products if its systems were not ready.
Until the anticipated hiccups in the system are worked out, some experts say, the conversion could actually harm some consumers by delaying their closings.
"This should be great for consumers in the long run, although in the short term there could be a delay in settlements just because it's a change in processes," says Jonathan Corr, president and chief executive of Ellie Mae, a software provider for more than 100,000 mortgage professionals in Pleasanton, Calif. "Making things simpler for consumers can increase the complexity on the back end."
The rules will apply to consumers who apply for a loan after Aug. 1, Corr says.
"If you apply for a loan in July and close sometime after Aug. 1, you'll still be using the old forms," Corr says.
When the rule goes into effect, all buyers will see two new documents: loan estimate and closing disclosure documents.
Replacing the good faith estimate and the early truth-in-lending statement will be the loan estimate form, which summarizes the terms of a mortgage and estimates loan fees and closing costs. The new form combines the good faith estimate with the early truth-in-lending statement into one shorter document.
Replacing the final truth-in-lending statement and the HUD-1 settlement will be the closing disclosure form, which provides a detailed account of the entire real estate transaction, including loan terms, fees and closing costs. The new document combines the truth-in-lending statement and the HUD-1 settlement into a form that is shorter and more user-friendly. It's easier for consumers to read.
"Fifteen years ago lenders and title companies weren't held to their estimates of what a loan would cost, so occasionally you would hear horror stories of borrowers forced to pay an extra $5,000 at the closing table," says Mark Dietz, senior vice president and area sales manager for EagleBank in Potomac, Md. "Earlier revisions to transaction documents made it clear which fees could change and which ones couldn't. These new revisions are taking clarity one step further, which is a good step to make consumers feel more confident that they understand their loan terms."
Experts say that the new documents are designed to make it easier for consumers to compare loan options as well as to understand if something changed between the time they applied for a loan and the settlement.
"Given time, I'm sure they'll work through any kinks in the system, but right now I think everyone in the industry has a sense that this is a dramatic, significant change to the way transactions have been handled in the past," Kider says.
Loan estimate requirements
In addition to the revision of the forms required for real estate transactions, the new CFPB rules require lenders to provide a loan estimate to borrowers within three business days after they apply for a mortgage and to provide a closing document three business days prior to the closing, says Todd Ewing, president of Federal Title & Escrow in Washington.
The closing documents now are supposed to be given to consumers 24 hours prior to settlement, but in practice, the documents are sometimes seen on the same day as the closing.
"While consumers may not be that aware of this, this changes the traditional interface between buyers, sellers, lenders and title companies," Ewing says. "Traditionally, title companies prepared and delivered closing documents to borrowers, but now that lenders are being held responsible for meeting the deadline, lenders are typically taking on the preparation themselves."
Kider expects that lenders and title companies will work in coordination with each other even though the lender is ultimately held responsible for meeting the standards of the regulation.
Ewing says he thinks the three-day rule is a good one because it gives borrowers an opportunity to review the documents and avoid surprises at the closing table.
"The three-day rule prior to the closing is the piece of these new regulations that will have the biggest impact on consumers," says Josh Greene, president of Eastern Title & Settlement in Rockville. "They will have time to really read the loan terms and the closing documents. If they don't understand something, they have time to call their Realtor, their lender or their title company and ask them for an explanation."
The three-day rule for the initial loan estimate redefines what goes into a loan application, Dietz says.
"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," Dietz says. "Once the lender has that information, the clock starts ticking on the three business days to generate a loan estimate. Then the borrowers have to 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, Kider says.
Today, borrowers often provide documentation and sometimes pay for an appraisal before the good faith estimate is generated.
"Nothing else can be done and no other fees can be charged until the borrowers sign that intent to proceed form," Kider says. "In theory, the consumers can shop around during that 10-day period for other loans and use the loan estimate form as a comparison tool."
In a competitive housing market, though, buyers who have identified the home they want to buy will be more likely to sign the intent to proceed form immediately so that they can solidify the contract.
While an official loan estimate is only generated after a loan application for a specific property is made, Dietz says lenders can generate a "fees worksheet" or similar document to help borrowers prepare for their cash needs at the closing during a pre-approval process.
"A pre approval in today's real estate market is the equivalent of a commitment to lend money to borrowers," Dietz says. "The final loan approval process takes place once they have the signed contract in place, an appraisal and a clear title to the property."
Typically borrowers provide full documentation of their income, assets and credit to obtain pre approval for a loan before shopping for a home, but without the additional required information about the home they intend to buy, this is not considered a full loan application.
Real estate agents worry
One concern among real estate professionals, particularly during the first weeks or months after the new regulations go into effect, is that more settlements could be delayed.
"The three-day rule will prevent things like getting a note at 3 p.m. for a 6 p.m. closing that says the borrowers need $3,000 extra," Greene says. "On the other hand, if something does come up that needs to be changed, it could trigger a new three-day wait before the closing can go through. Lenders won't be able to change things on the closing disclosure without restarting the clock on getting documents to the borrowers three business days before the closing."
Even if a glitch technically only impacts one closing, if that closing is required before the sellers can close on their next home it could create a domino effect delaying several moves.
"Buyers typically do a walk-through of the property they're buying a day before or the day of a closing, but that's not likely to trigger a need to redo the closing disclosure as long as the terms of the loan don't change," Ewing says. "If changes have to be made by the lender to the loan itself, that could cause delays."
If the borrower opts to switch from a fixed-rate loan to an adjustable rate mortgage or if the annual percentage rate (APR) changes by more than one-eighth of a percentage point after the closing document is generated, the borrowers will need to wait for a new form to be generated and then delay the closing until three business days after the new form is received, Corr says. However, he says, minor issues won't reset the clock.
One concern about the new forms shared by the National Association of Insurance Commissioners and title insurance companies is the use of the term "optional" on the form to refer to the purchase of owner's title insurance, Ewing says.
Title insurance protects the lender in the case of a future title dispute, but homeowners are typically advised to purchase their own title insurance to protect their investment in their home.
"Owner's title insurance has always been optional, but putting that directly on the disclosure form will encourage more people to skip it," Ewing says. "It would be better if it said 'recommended but optional.' Protecting your equity in your property is so important, and we're concerned about potential future issues if fewer people purchase the insurance."
Ewing says a related issue is that sometime simultaneous purchasing of lender's and owner's title insurance can result in a discount on one or both policies, which isn't reflected on the loan estimate. In some states it is customary for the sellers to pay for the owner's title insurance policy, but the new forms don't leave room for that option, he says.
What you can do
While the onus of adapting to the new rules falls on lenders and title companies, consumers can take steps to avoid settlement delays.
"Be aware that the new rules are coming and make sure you're working with a lender and a title company who are on top of this," Greene says.
Corr says consumers should see the new regulations as a great opportunity for them to have time to read the information about their loan.
"Review the documents immediately and compare them to the loan estimate to make sure they match," Corr says. "The sooner you catch an error the better so you can avoid a significant delay in your settlement."
Corr says borrowers should rely on their lender and real estate agent to help them understand the documents.
"This is the most significant transaction most people make in their lives both emotionally and financially, so it's important that consumers educate themselves on the process," Dietz says. "They should go to the CFPB site to learn what they can and then not be afraid to have a sincere dialog with their lender to get any questions answered."