Paperwork for mortgage closings undergoes major overhaul
The mounds of paperwork potential homeowners sign at a mortgage closing is undergoing a major overhaul.
The changes, which take effect Aug. 1. are being imposed by the U.S. Consumer Financial Protection Bureau (CFPB) to address problems that surfaced during the meltdown of the housing market when millions of buyers took on complicated loan products they didn鈥檛 understand and ended up losing their homes in short sales or foreclosures.
鈥淭his is one of the biggest changes in the real estate industry and will take a while to see if it蘑菇视频 beneficial,鈥� said Scott Detweiler, president of the Fayette Board of REALTORS庐.
Lenders and realtors agree the biggest impact the changes will have on consumers is a new three-day waiting period enabling them to review all the paperwork and ask questions rather than rushing through it at settlement.
Also, the good faith estimate, the truth-in-lending document and the HUD-1 settlement are set to disappear under the new rules established by CFPB in accordance with the Dood-Frank Act.
They will be replaced with a new loan estimate form that combines them into a shorter document.
Experts say the changes will force lenders to centralize or regionalize their closing process.
鈥淭he timing requirement will definitely be the biggest challenge,鈥� said Suzanne Huls, assistant vice president of mortgage lending at Somerset Bank based in Somerset.
Huls said although the changes will be easier for the consumer to understand, it蘑菇视频 going to be taxing for realtors and banks.
鈥淭here are some advantages, but the biggest disadvantage is the time frame that could delay the closing process,鈥� said Joe Klocek, assistant vice president of Somerset Bank in Connellsville.
According to the American Bankers Association, a survey showed that more than 20 percent of banks would opt not to offer certain mortgage products if the software is not in place to accommodate the new rule.
Huls said the bank has been preparing for the changes since the beginning of the year as they plan to test loans as the next step before getting the new software up and running before August.
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 closing disclosure form will replace the final-truth-in-lending statement and the HUD-1 settlement, which provides a detailed account of the entire real estate transaction.
The new document combines both former statements into a form that is shorter and more user-friendly, making it easier for consumers to read.
In addition to the revision of 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.
鈥淭his new rule is a big change for the lending and settlement industry,鈥� said Uniontown attorney Gary Frankhouser. He added the new rule will initially have a learning curve, which may cause closing delays.
In a rising interest rate environment, Frankhouser said if a transaction is delayed past the rate lock expiration, the buyer蘑菇视频 new interest rate may increase. 鈥淭his could cause a buyer to back out of a transaction, or worse; an increased interest rate could impact the buyer蘑菇视频 ability to be approved for the mortgage,鈥� he said.
Ewing said, 鈥淭raditionally, 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.鈥�
Typically, borrowers provide full documentation of their income, assets, and credit to obtain preapproval 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.
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.
Detweiler said what it boils down to is protecting the consumer, but it蘑菇视频 really going to make it tough on banks and title companies to make sure things happen in a timely manner.
One concern about the new forms shared by the National Association of Insurance Commissioners and title insurance companies is the use of the term 鈥渙ptional鈥� on the form to refer to the purchase of owner蘑菇视频 title insurance, Ewing says.
Title insurance protects the lender in the case of a future title dispute, but homeowners area typically advised to purchase their own title insurance to protect their investment in their home.
鈥淭his is the most significant transaction most people make in their lives both emotionally and financially, so it蘑菇视频 important that consumers educate themselves on the process,鈥� says Mark Dietz, senior vice president and area sales manager for EagleBank in Potomac, Md. 鈥淭hey 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 unanswered.鈥�
The Washington Post contributed to this story.