Why is this happening?
The CFPB (Consumer Financial Protection Bureau) has mandated that buyers/borrowers must now be given at least three business days (upon their receipt of the Closing Disclosure) to review the new form before the buyer/borrower can enter contractual obligation with lender for the real estate transaction (now known as consummation). This will allow buyer/borrowers to review the terms and conditions of their loans in a non-stressful environment and ask questions if they need clarification before they get to the closing table.
The new Loan Estimate replaces the Good Faith Estimate (GFE) and is required to be handed or mailed to a borrower within 3 days of a mortgage loan application being taken. The Loan Estimate is designed to provide disclosures that will be helpful to buyers/borrowers in understanding the key features, costs, and risks of the mortgage loan for which they are applying, including the property to be taken as collateral, length/purpose/type/loan terms, origination costs, projected payments, estimated costs & cash to close. The loan estimate could also include items not listed here.
The Closing Disclosure replaces the Truth-in-Lending Disclosure (TILA) and the HUD-1 Settlement Statement (HUD). In most cases the Closing Disclosure will be prepared and delivered by the lender (The HUD and TILA were historically prepared by Title Companies). Part of the regulation requires that there be proof that the borrower has received the Closing Disclosure, if that does not happen 3 days prior to the scheduled closing date then the closing will have to be rescheduled to allow for the 3 day review. The CD is a much more customer friendly document than the two it replaces. It lists all costs and fees in alphabetical order, detailed information about loan terms/interest rate/payments/penalties, necessary disclosures, and contact information for vendors that assisted with the transaction. The CD is considered to be non-public personal information related to the buyer and therefore will not be seen by the seller or seller’s agent.
As stated above, the Loan Estimate must be given or mailed to the borrower within 3 days of a mortgage loan application being taken; the Closing Disclosure must be received by the borrower at least 3 days before the loan can be closed. This may mean transactions could take longer if a loan is involved. There are also certain instances (some listed below) in which the Loan Estimate or Closing Disclosure or both will need to be redone and resent to the borrower. If this happens the closing could be pushed back 3-10 days to accommodate the required timelines. It is important to note that these timelines are required and therefore can NOT be waived.
Below are some examples of when it will be necessary to redo one or both of the forms. This list is in no way meet to be exhaustive or final. Ultimately, because the regulation is lender focused, the lender will have the final word on when a “do over” will happen.
-If APR increases by 1/8%
-If there are changes to the type of loan (e.g. fixed to adjustable)
-If a prepayment penalty is added.
-Last minute buyer/seller negotiations
-Disclosed costs increasing by less than $100
-Governmental fee changes (recording fees, etc.)
What does this all mean for me?
This new regulation is a good thing for borrower/buyers but it is also a change from how things have been done for a long time. Communication is key for all parties involved in a real estate transaction to be on the same page. If you are a buyer you will want to get the loan process started sooner than later. That includes making sure your lender has all the necessary documents (tax returns, pay stubs, bank statements, etc.) to process your application. Ask your realtor, lender, and title company questions if you don’t understand, that’s what we are here for. If you are a seller most of this will not affect you outside of the extra time that might be required. If there is a delay please remember it doesn’t mean that your buyer has bad credit or did something wrong it just means that everyone is working inside a new system.
If you have any questions please feel free to call Title Company of the Rockies at 970-453-6120 or Paffrath and Thomas at 970-453-0466.