Ch-ch-ch-changes! Most of us don't like change, but we sure have seen a lot of changes since the real estate meltdown in the last 8 years. We now can look forward to new documents and procedures in real estate purchases as of August 2015. But it looks like these changes will be for the better:
The standard HUD-1 statement that we've all seen for years, is about to be replaced with the "Closing Disclosure". Title Agents and Lenders are becoming familiar with the new form already. The new documents were published earlier this year, by the Consumer Financial Protection Bureau, or CFPB. Although the settlement process will change on their end, it will not effect consumers and agents as much. Here are the five things that we all need to know:
1. New Forms
- Previously, buyers received two different forms from their lender, the Good Faith Estimate, and the initial disclosure. Both forms will now be combined in a three-page Loan Estimate form. It must be provided to borrowers at the beginning of the transaction.
- The HUD-1 Settlement Statement and the final TILA fomrs will be combined into a new simplified form, the Closing Disclosure. This five-page form will disclose several terms and provisions, and it will show the financial transaction details of the sale.
2. Time Frame Will Be Impacted
- The CFPB mandates that borrowers have three (3) days to review the Closing Disclosure. This will not add a tremendous amount of time to the closing...if everything goes as planned.
- Important Note about this three-day review period: it starts upon receipt of the document by the borrower. The borrower should confirm that they received the document, which most likely will be through email. Otherwise, the form will be deemed to be received three days after it was sent, as if by actual snail-mail. The result could be six business days this way, instead of three. Agents will want to make sure their buyers are aware of this, and will want to schedule settlements accordingly.
- If there are any "major" adjustments to the fees charged to the buyer at settlement, the Closing Disclosure will have to be re-written and the three days will start again, delaying settlement. Our title attorney tells us that this is nothing to be overly concerned about, most adjustments that are usually made are considered minor...if everyone has done their job well.
- RE-Disclosure - There may be things that happen after the walk-through, or because of a delay. Most of these changes will not be considered significant. The focus of the re-disclosure rules is the protection of the consumer from changing fees by the lender or title company. The rules specify the scope of changes that are allowed.
3. The forms have been simplified. The line numbers have been removed and there are seven sections with categories of fees.
A. Origination Charges
B. Services Borrower Did Not Shop For: Items required by the lender, like credit report, appraisal, various fees.
C. Services Borrower Did Shop For: Title Insurance, Survey fee, Pest Inspection, Settlement Agent's fee, etc.
D. Taxes and Other Government Fees: Recording fees, Transfer tax, etc.
E. Prepaids: Items paid in advance, like Homeowner's Insurance, Mortgage Insurance Premium, Prepaid Interest and Prepaid Taxes.
F. Initial Escrow Payment at Closing
G. Other: This is where we find agent commissions, Title Fees, HOA Fees, Home Warranty, etc.
At the end of the form there is a Summary of the Transaction, much like the old HUD-1, with the borrower's amounts on the left and the seller's amounts on the right. This is followed by an outline of the terms of the loan, basic loan calculations, and the contact information for all parties involved.
After reading the new Closing Disclosure, most lenders, title attorneys and agents that we've talked to think it is a needed improvement. It will force us all to do our best throughout the transaction; no one will be able to wait until the last minute, or be sloppy with the numbers. Many lenders are already using the forms and procedures in advance, and find that they have made the process better.
How the Closing Disclosure Affects Real Estate Agents
The new Closing Disclosure affects the process for lenders and title agents by reversing the duties. The lender is now responsible for the details of the disclosure, whereas in the past, the task fell to the title department. Much of the work will still have to be done by the title department, like the title search, so it adds a layer of communication between the title and lender, which will probably add more time and coordination.
For agents, the main change is that they will have to add more time to the period between contract and closing, building in the extra time for the borrower's right of review, and for any unforeseen changes that may occur to the Closing Disclosure. Agents will want to stay on top of every aspect of the transaction, which is nothing new, but with a different time reference. Last minute procrastination has never been popular, now even more so!
How the Closing Disclosure Affects Home Buyers
Buyers will most likely receive more than one Closing Disclosure, One at the beginning of the transaction, one a week before settlement. Buyers may want to schedule two walk-through's, to insure time to address any problems arising that might result in an adjustment to the Closing Disclosure.
The most likely affect on a home buyer will be the need to schedule their settlement a week longer out than previously. The time from Contract-to-Close will most likely become longer than we've seen in the past.
Who is the Consumer Financial Protection Bureau?
The CFPB is a government agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This independent agency (meaning not answerable to Congress) was created to protect consumers in the financial sector. The CFPB has jurisdiction over banks, credit unions, mortgage-servicing operations, and foreclosure relief services, which all affect the real estate industry, as well as other financial companies in the U.S.
In January of 2012, President Barack Obama appointed Rich Cordray to be the first Director of the CFPB. They educate, advocate and take consumer complaints. They regulate and enforce laws and rules. They research consumer behaviors. They serve to protect consumers from unfair financial practices. According to their director, the three items of their current focus are Mortgages, Credit Cards, and Student Loans.
If you have any questions on this subject you can contact Karen at Frederick Real Estate Online or call her at 301-401-5119.