KIMBERLY A. SALERNO, ESQ.
On Nov. 20, 2013, the Consumer Financial
Protection Bureau (CFPB) released their “final
rule” regarding the integration, simplification
and improvement of consumer disclosures given
in a mortgage transaction (with an effective date
of Aug. 1, 2015).
The changes will affect not only lenders, but
also every third-party service provider a lender
deals with (i.e. settlement agents, real estate
agents, title companies, appraisers) because if
the third-party provider is not compliant with
the regulations, the lender is held responsible
for their mistakes.
What is the CFPB? It was created to watch
over the interests of American consumers in
financial products and services of all kinds. The
“final rule” was enacted to make it easier for
consumers to shop for mortgages and protect
them from costly surprises at their closing by
integrating consumer disclosures. Many of us
in the real estate industry have been preparing
for these changes for several years…Are you
prepared?
So what are the changes? First, let’s take a
look at the five primary changes we can expect
from Lenders:
1. Loan Estimate Form (or LE): This form will be provided to consumers within three business
days after they submit a loan application. It
replaces the early Truth in Lending statement
and the Good Faith Estimate, and provides a
summary of the key loan terms and estimated
loan and closing costs. Consumers can use this new form to compare the costs and features of
different loans.
2. Closing Disclosure Form (or CD): This form
integrates the HUD-1 and the “final TIL”.
There are multiple versions of the form to
account for different transaction types, such
as a refinance and a purchase. There also is a
seller-only form. Because the form is a mixture
of loan information and settlement costs, communication
and cooperation between the lender
and closing agent will be necessary to complete
the Closing Disclosure. If the settlement agent
completes the Closing Disclosure form, the
lender will need to provide a copy of the Loan
Estimate form, as the information it provides
will be necessary to complete the Closing Disclosure
form.
3. Three-day Rule: Consumers will receive this
form three business days before closing on a loan.
The CFPB conducted more than two years of
extensive research, testing, and review to find
out how to create mortgage disclosures that do
what the law intended them to do: disclose information
in a way that consumers can understand.
A good disclosure helps consumers know if they
want to commit to the loan being offered, and it
enables them to make meaningful comparisons
between loan products for better shopping. If
any changes are needed on the CD during that
three-day period, the customers’ closing likely
will be delayed.
4. Delivery of Forms: Under the rule, either
the creditor or a mortgage broker acting on their
behalf may provide the Loan Estimate Form to
the consumer. However, in either situation it is
the creditor who is ultimately responsible for
complying with all requirements concerning
the information provided in the form and its provision to the consumer.
5. Tolerance Levels: The concept of “tolerance
levels” was introduced with the 2010 GFE and
HUD-1. Under the CFPB rule, this concept is
carried forward but some of the items will fall
under more stringent tolerance levels.
Second, how will the changes affect real
estate agents? Realtors will need to be able
to talk their clients through the new forms.
Realtors will also need to be cognizant of the
mandatory three-day notification for both the
Loan Estimate form and the Closing Disclosure
form, since it will affect the timing of the transaction.
Lastly, realtors will need to be prepared
for clients having to qualify for a mortgage under
the more stringent underwriting requirements
of the Ability-to-Repay/Qualifying Mortgage rule.
Third, how will the changes affect the home
buyer and seller?
“Taking out a mortgage is one of the biggest
financial decisions a consumer will ever make.
Our new ‘Know Before You Owe’ mortgage forms
improve consumer understanding, aid comparison
shopping, and help prevent closing table
surprises for consumers,” said CFPB Director
Richard Cordray. “Today’s rule is an important
step toward the consumer having greater control
over the mortgage loan process.”
The CFPB’s whole purpose is to ensure that
consumers get the information they need to
make the financial decisions they believe are
best for themselves and their families. However,
as with any industry wide change, there will be a
learning curve for all of us in the real estate field.
That being said, it is more important than
ever that a lender, realtor, home buyer or seller
use an attorney that focuses their practice in
real estate.
Salerno is the principal in Salerno Law PC and a licensed agent for Stewart Title Insurance Co.
Photo Courtesy Salerno Law PC.