There’s a storm brewing in the world of residential real estate. Well, maybe not a storm, but there is a significant change coming soon.
At the beginning of October, home buyers will experience a different – some would argue better – process when applying for and securing a mortgage. The change will come from the Consumer Financial Protection Bureau, also referred to as the CFPB. The CFPB is an agency that helps consumer finance markets work by doing three things:
- making rules more effective
- consistently and fairly enforcing those rules
- empowering consumers to take control over their economic lives
In November of 2013, the CFPB issued the Integrated Mortgage Disclosures Rule under the Real Estate Settlement Procedures Act and the Truth in Lending Act, combining certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan. In October 2014, the Bureau proposed amendments that were finalized in the beginning of 2015. which yielded the amendments were to be in effect on August 1, 2015. Recently, the CFPB has extended this effective date to October 3, 2015.
The amendments currently and will continue to have an effect on homeowners, buyers, sellers and other stakeholders in the real estate world. In addition, this new update will affect the home buying experience in several ways. As a result of this update, the mortgage, title, and escrow industries have been putting new processes in place to ensure that residential real estate transactions adapt to the new ruling.
According to the CFPB, the new disclosures are easier to understand and use than the existing disclosures. In addition, the Loan Estimate you get once you apply for a mortgage and the Closing Disclosure you get before you close are designed to work with each other. I agree that the new disclosure are easier to read and will benefit home buyers. Judge for yourself by comparing the old and new here.
In addition, the CFPB published some clear benefits in their publication titled What the New Simplified Mortgage Disclosures Mean for Consumers. Here are a few benefits that consumers can expect to experience:
1. Reduced paperwork
Combining several forms and additional statutory disclosure requirements into two forms will reduce paperwork and consumer confusion.
2. Clearer language and design
Using clearer language and design will help consumers understand complicated mortgage loan and real estate transactions.
3. Highlighting most important information
On the new forms, the interest rate, monthly payments, and the total closing costs will be clearly presented on the first page. This makes it easier for consumers to compare mortgage loans and choose the one that is right for them.
4. Cost information on taxes, insurance, and interest rates
Providing more information about the costs of taxes and insurance and how the interest rate and payments may change in the future. This information will help consumers decide whether they can afford the mortgage loan and the home, now and in the future.
5. Warnings about what to avoid
Warning consumers about features they may want to avoid, like penalties for paying off the loan early or increases to the mortgage loan balance even if payments are made on time.
6. More reliable information on services
Making the cost estimates consumers receive for services required to close a mortgage loan more reliable, for example, appraisal or pest inspection fees. The rule prohibits increases in charges from lenders, their affiliates, and for services for which the lender does not permit the consumer to shop unless a specific exception applies. Examples of the specific exceptions include when information provided by a consumer at application was inaccurate or becomes inaccurate, or when the consumer asks for a change in the services.
7. More time to review the closing disclosure
Requiring that consumers receive the Closing Disclosure at least three business days before closing on the mortgage loan. Currently, consumers often receive this information at closing or shortly before closing. The pressure to read and sign all of the closing documents can be stressful. This additional time will allow consumers to compare the final terms and costs to the terms and costs they received in the estimate. That will better equip them to raise any questions before they go to the closing table.
Final Thoughts on the CFPB Changes
It is worth noting that the Consumer Financial Protection Bureau seeks to strike a balance between the interests of lenders and that of borrowers. The primary rule that will shape the market is that lenders will now be required to ensure that the borrowers have the capacity to repay the mortgage that has been extended to them. Consequently, the lenders will be offered a protection against the borrower’s lawsuits provided they follow the guidelines that have been adopted. Lenders will have also have to document that they have taken reasonable measures to ensure the credibility of the borrowers.
As the new rules take effective October 3, 2015, it is important for consumers to ask questions and talk through the entire mortgage process with their real estate agent and financial partners. Educating yourself on the process and knowing your responsibilities from start to finish will ensure a smooth transaction and home buying experience.
Be prepared for longer escrows once this takes effect as the industry adjusts to this change. There will be growing pains, but in the end the benefits for the home buyer will be worth the effort.