For years, home buyers taking out what was probably the biggest loan of their life would get a stack of disclosure forms with small print alluding to things like a “variable rate feature” and a “prepayment penalty.” As it turned out in the housing bust of 2008, many of them didn’t quite realize that these phrases meant their payments could skyrocket after an initial period, or that they’d be penalized for paying off their loan early.
But the Dodd-Frank Act of 2010 forced the Consumer Financial Protection Bureau to make those disclosure forms, which are meant to explain the conditions of the mortgage and the closing costs, more consumer-friendly. The agency unveiled the results last month, saying the new forms would go into effect on Aug. 1. But real estate pros now say they’re concerned that the simpler forms, which must be provided on a tighter timeline than before, might actually slow down closings—at least initially.
“It will probably be painful for the first three to six months after we start working with the new rules and forms, and some closings could be delayed,” said Patrick Cunningham, a partner and vice president with Home Savings & Trust Mortgage in Fairfax, VA. “It’s very important that buyers work with a Realtor®, lender, and title company that they trust to avoid delays if possible.”
The disclosure forms are used by title companies and lenders, and real estate agents sometimes show the forms to buyers so they’ll know what they will sign at settlement, or closing.
“The new mortgage disclosure forms coming in August will help consumers comparison shop for mortgages and avoid surprises at the closing table,” said CFPB Director Richard Cordray when he presented the new disclosure forms to the public on March 31.
These are what borrowers will now receive:
- Loan estimate. This form replaces both the early Truth in Lending statement and the good-faith estimate and provides a summary of loan terms as well as estimated loan and closing costs. Buyers must receive this three days after applying for a loan, so they can have time to shop around.
- Closing disclosure. This form replaces both the final Truth in Lending statement and the HUD-1 settlement statement. It sums up the final costs for the loan and closing and explains how payments are to be made. Buyers must receive this three days before closing, so they have enough time to fully review it.
You still have to read the forms
Although the new forms could be good for consumers because the intent is to clarify their loan terms, Cunningham said borrowers still need to do their part.
“People don’t always read their documents even though we ask them to,” he said. “At least [the new forms] look a little clearer than the old forms.”
Cunningham says the biggest problem he anticipates after Aug. 1 is complications in getting the closing disclosure finalized and delivered to the buyer three days before settlement.
“Right now, the general practice is that Realtors schedule a walk-through the day before or the day of settlement, but sometimes changes need to be made after a last-minute negotiation between the buyers and sellers, and sometimes loan documents get sent over just prior to the closing,” Cunningham said. “In theory, this will all happen three days before settlement—but in practice, I expect some settlements to be delayed because of the three-day rule.”
Delaying a settlement can cost both buyers and sellers money if moving arrangements have already been made. This could even affect another closing if the sellers are purchasing another home, Cunningham said, adding that delays can be avoided as long as the lender, real estate agent, and settlement company remain in communication.
Is ‘optional’ optimal?
Diane Evans, president of the American Land Title Association and vice president of Land Title Guarantee Co. in Denver, said she’s disturbed that on the new loan estimate form, owner’s title insurance is labeled as “optional.” The old good-faith estimate forms merely said, “You may purchase an owner’s title insurance policy to protect your interest in the property.”
“For a one-time fee paid at the closing table, an owner’s title insurance policy protects a home buyer from having to pay legal fees and claims that were not discovered during the title search, such as back taxes owed by previous owners, compensation to an unknown heir for their interest in the property, or even if there was a forged signature on a deed,” Evans said. “The introduction of the word ‘optional’ may diminish the perceived value of this insurance.”
In addition, Evans noted, although owner’s title insurance can be paid for by either the buyer or the seller, the new forms assume the buyer will pay.
“Hopefully, everyone will be able to work out their systems and processes ahead of time,” Evans said, “but it would be easier if the new policies could be phased in rather than introduced with a hard stop on Aug. 1.”
So if you’re buying a home this summer or fall, stay in close touch with your lender, agent, and title company to avoid last-minute glitches.