New Mortgage Rules Aim to Simplify Paperwork for Buyers
Closing mortgage documents will become a little simpler for homebuyers come Aug. 1 when new federal regulations go into effect. While the new forms may make the process slightly easier for borrowers, it will seriously shake up things for mortgage lenders, with some warning they may not be able to close loans as quickly anymore.
The change in paperwork is the Consumer Financial Protection Bureau’s effort to comply with the Dodd-Frank Act which aimed to protect consumers in the wake of the financial crisis. The CFPB’s guidelines call for fewer closing documents and a larger window between delivering that paperwork and the actual close of a home loan.
The new closing forms will include just two disclosures instead of the current four. The first disclosure will be a Loan Estimate, which replaces the Good Faith Estimate – an approximation of the terms and forecasted closing costs - delivered a few days after a mortgage application is submitted. The second form will be the Closing Disclosure, the final settlement statement.
These changes are not just a simplification of forms but actually revise much about the entire home loan closing process, according to Jonathan Corr, chief executive of Ellie Mae, a loan origination software provide for the industry. Things like what triggers a disclosure requirement and when a re-disclosure might be required are both included in those changes.
“From a practitioner standpoint, it’s a massive change,” Mr. Corr said. “It’s definitely the biggest regulatory change in the last 20 years.”
Timing and responsibility are two of the biggest changes involved. As of Aug. 1. home buyers must receive the Closing Disclosure at least three days before the final close of the loan. Currently they can receive the settlement statement as late as one day before.
“We’ve got to get the Closing Disclosure out and everything wrapped up seven days before the closing date,” Bob Kelly, senior vice president at Bank of America in Charlotte, North Carolina. “We can’t wait for transmission of data back and forth 24 hours in advance. Getting your processes prepared to handle a Closing Disclosure that is likely to hit the mail six to seven days ahead of the closing date, that is going to cause all of us to have to redo some of our workflow processes and some of the things we have become accustomed to doing.”
Some lenders have predicted that the requirement to have the disclosures get to customers earlier will simply push closing dates out farther, with an average close moving from 30 days to 45 days. Only concerted effort among lenders, settlement agencies and title companies will ensure that doesn’t happen. “We want to figure out how to change the process so we can all meet the same date we meet today. It’s a big challenge to figure out the right way to do that,” Kelly said.
The other big change is about who is ultimately responsible for the disclosure forms. It looks as if all that responsibility will lie with mortgage lenders. For example, the new rules say that the Closing Disclosure can be provided by either the lender or the settlement agent, but ultimate liability is upon the lender.
“We understand that similarly to how the HUD-1 prepared today is a collaboration between the lender and the settlement agent, with the final version being produced by the settlement agent, this would be the reverse — a collaboration on all the numbers between the lender and the settlement agent, with the final version being produced by the lender,” said Penny Reed, vice president of settlement services at Wells Fargo Home Mortgage in Minneapolis.
Hopefully the new requirements will in fact make the home loan process easier for buyers to “know before they owe” as all those behind the scenes come together sooner to put out the simplified forms.