New CFPB Rules for Obtaining a Mortgage
As of October 3, 2015, the process for obtaining a home mortgage and the closing process will completely change due to the introduction of new rules from the Consumer Financial Protection Bureau (CFPB). While most consumer advocate groups are cheering this change, the Real Estate community is throwing a hissy fit. The truth is, if we as an industry had advocated the same safeguards for our clients, the government would never have felt the need to step in.
Before we get into the mechanics of what these changes are, it is important to examine why the government felt the need to enact new rules. As we all learned from the most recent recession, a key component was the financial meltdown caused by the large number of defaulted home mortgages. Aside from the economic hardships which caused people to lose their homes, many borrowers were victims of predatory lending practices and were unaware of the structure or details of their mortgage. The reasons for these disparities were many, but were primarily due to confusing disclosure forms, dishonest lenders, and Realtors who stood by and let their clients be taken advantage of time and time again. Due to these factors, a provision of the The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was established by the CFPB which has now enacted certain protections for consumers.
Now that we know a little about the history, examining what is changing is important.
- Goodbye confusing mortgage disclosures: Before these new rules were enacted, consumers were given a Good Faith Estimate and Truth in Lending Forms within days after applying for a mortgage. While they were informative, many borrowers had a hard time understanding their loan terms. As a replacement for these, a Loan Estimate is given which essentially combines these forms and makes the terms and cost of the loan easier to understand. The CFPB has also provided borrowers with and interactive tool to explain this form. Please visit http://www.consumerfinance.gov/owning-a-home/loan-estimate/ for more information.
- Goodbye confusing closing form known as the HUD1 Settlement Statement: This confusing form will now be replaced with a form titled Closing Disclosure. This combines parts of the Loan Estimate with the traditional layout of settlement (closing) charges and credits. The biggest component of this form is the timing. This form is generated by the lender and has to be given to the borrower 3 days before closing. This means no more getting slammed at the last minute with your closing documents and not having time to review them. This is a great protection for buyers as they will now have a full understanding of the closing costs and process days in advance. The only downside this form/process brings with it is most large banks will be mailing this form to their borrowers which will add another few days to closing. If the rate, term, or Annual Percentage (APR) changes within the 3 days, the CFPB mandates the form must be regenerated and resent which will trigger a 3 day delay. Realistically, no changes to your rate or term should be seen that close to the end of the transaction. To view this new form, please visit http://www.consumerfinance.gov/owning-a-home/closing-disclosure/
- Goodbye 30 day closings: Lenders are now asking for 45 days on Conventional, FHA and VA loans and 60 Days on Jumbo Loans.
- Hello Seller’s Leasebacks: One of the provisions the Texas Real Estate Commission is adding to the contracts is an additional 10 day extension to the contract if the buyer’s lender needs additional time to comply with these new CFPB disclosure regulations. This will lead to an increase in seller leasebacks whereby after closing, the seller remains in the home for a short period of time. This is already fairly common, but will increase due to the unsure nature of exact closing dates due to the ten day extension mentioned previously. Most sellers will start to push back on the idea of simultaneous closings.
- Hello Shorter Option Periods: In the Texas contract, there is a clause known as the unrestricted right to terminate – otherwise known as the option period. This is the time when the buyer has the home inspected and then decides whether or not to terminate the contract without penalties. While this time frame is always negotiable between the buyer and seller, it is normally between 7-10 days. Now, we will need to find wasted time to shave off the total process time. Therefore, the agreeable option periods will likely be shortened.
In closing, while there is still a lot of confusion around the new process and forms, it is a great move in the name of consumer protection. Once again, as an industry, had we made service providers treat clients with the care, trust, and competency, none of this would have happened. Having a knowledgable Houston Realtor to help explain these changes to you is vital to your transaction. In the long term, I doubt the new CFPB rules will do anything other than extend the time frame of transactions and clear the industry of bad lenders. While the consumers are the clear winners with these new rules, my heart does go out to the small independent lenders who could be forced out of business due to the tremendous cost of compliance with these new rules.
To view the new CFPB forms, please click these links or the ones above