CFPB changes the rules for the mortgage lending process: Will less be more?
The CFPB changes did dramatically alter every real estate transaction that involves mortgage financing. These changes are affecting every participant in the process, from buyers and sellers to every professional, but none more than the people in the mortgage industry. I’ve asked Jason Oelrich, CPA and Production Manager (NMLS #22095) at PrimeLending to summarize the new rules and the consequences. If you are in the market to buy or sell, I recommend you read what Jason has to say on the subject.
On October 3, 2015, new “Know-Before-You-Owe” rules will govern the mortgage lending process. They were created by the all-powerful Consumer Financial Protection Bureau – “CFPB.” The new CFPB changes, while well meaning, will have unintended consequences that have the potential to stifle homeownership.
Four forms become two
On the surface, the idea of combining four disclosure forms into two new forms was a noble undertaking. The four old forms were difficult for the average consumer to comprehend. Tests with individual consumers affirmed that the two new forms were easier to understand. The old Good Faith Estimate and Initial Truth-in-Lending forms were combined into a new form called the “Loan Estimate” (“LE”) form. The HUD-1 Settlement Statement and Final Truth-in-Lending forms were merged into a new form called the “Closing Disclosure” (“CD”) form. According to the CFPB, the desired outcomes of these two new forms were to help consumers to:
- better understand the loan options up-front
- shop for the mortgage that is best for their specific situation
- avoid costly surprises at closing
No early documentation and no up-front fees
Additionally, the CFPB changes establish that lenders may not require income or asset documentation from prospective applicants prior to having issued the Loan Estimate. The CFPB changes also decree that the lender cannot collect any up-front fees or deposits from applicants, other than the cost of a credit report.
Strict timelines may cause delay
As it concerns timelines, the CFPB changes dictate strict adherence, including the following:
- The Loan Disclosure (LE) form must be delivered within 3 business days of receiving an application for a home loan.
- LE form must be received by the Borrower at least 7 business days prior to loan signing/consummation.
- Applicants have up to 10 days following receipt of the LE form to decide whether they wish to proceed with the mortgage. Only after applicants affirm their “Intent to Proceed” may the lender collect a deposit for 3rd party costs such as the appraisal order.
- The Closing Disclosure (CD) form cannot be issued until one day after the LE, at the earliest.
- The CD form must be received by the Borrower 3 business days prior to loan signing/consummation. An additional 3-day “Mailbox Rule” adds 3 more days to allow for conventional mailing of the CD form unless it is acknowledged sooner, in-person or electronically.
- Starting a new timeline, a re-disclosure of the CD is sent to the borrower if the borrower makes a change to the loan that impacts one of the following:
- A change in the APR of 0.125%
- A change in the loan product
- The addition of a prepayment penalty
- The separate CD for the seller must be delivered to the seller on the same day or before the Borrower signs their closing documents
Rigid rules will increase costs
The new regulatory rules are rigid. Home buyers who plan to finance the purchase of their new home will not be able to compete with cash buyers. There may be several unintended consequences.
- Based on the required review periods prior to closing, any unforeseen “bump in the road” on part of the buyer and/or seller can delay closing. This will have a domino effect on logistical considerations and the costs associated with moving.
- Because the loan origination and underwriting process is akin to a manufacturing process, any changes along the way result in the process having to be stopped. Starting over again in a systematic and rational manner within a backed up process can easily result in a delayed closing.
- Any delays with providing the Intent to Proceed back to the lender will delay the ordering of appraisals and other 3rd party services such as condominium HOA questionnaires. Because these products and services often take a long time to receive back, this can also easily delay closing.
- Due to the aforementioned lender constraints and rigid timeframes associated with the closing, purchases that are contingent on the sale of an existing home (including relocations) will make it virtually impossible to conduct a simultaneous closing. This will result in additional expenses for interim housing and moving expenses.
- Since the new rules forbid lenders from early access and documentation of a buyer’s income and asset, lenders will be unable to fully pre-approve the Buyer for financing.
- The burden associated with implementing and complying with these new rules will increase the costs for settlement services. Higher lender fees and interest rates will negatively impact housing affordability.
The new CFPB rules will forever change nearly every aspect of financing the purchase of a new home. Hopefully in the long run the benefits will outweigh the costs so that the American Dream of homeownership doesn’t become just a daydream.
How can you prepare?
Proactive communication is crucial. Be responsive to all communications from your loan officer, real estate agent, and escrow settlement agent. Make sure that you provide all documentation when requested and keep your loan officer informed of any changes that might impact your loan, such as credit inquiries, job changes, large deposits to your bank account, and any potential timing issues relative to your target closing date that may arise.