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Understanding New Mortgage Disclosures

New mortgage rules could delay home-buying process

Sept. 24, 2015

By BRYAN HORWATH The Wichita Eagle - Tribune News Service

Consumer-minded changes to the home-buying process are set to go into effect next month, leaving some in the mortgage industry wary of the potential creation of inefficiencies in the process.

As part of a federal mandate -- what it's calling a "know before you owe" initiative -- the Consumer Financial Protection Bureau will soon require that buyers receive a new "Closing Disclosure" document three business days before documents are signed at closing.

Currently, lenders must give a homebuyer their itemized HUD-1 settlement statement -- the document that the closing disclosure will replace -- at least 24 hours in advance of a closing.

The rules, which also include a measure requiring lenders to provide a detailed "Loan Estimate" form that lists all purchaser costs and fees, are scheduled to go into effect Oct. 3, according to the bureau.

"The rules going into effect are a direct result of legislative overkill -- ridiculous over-regulation," said John McKenzie, president and chief executive officer of Coldwell Banker Plaza Real Estate.

"There's no question that the lending debacle that took place (a few years ago) was a result of not enough underwriting controls or substantive oversight. Now we are swinging to the opposite end of the spectrum."

McKenzie, of course, is referring to the mortgage securities-driven financial crisis that several years ago devastated the U.S. economy. The new rules -- and the bureau itself, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 -- are direct results of the recession that hit in 2007 and 2008.

Minimize Stress
Essentially, the two new documents will replace a series of truth-in-lending forms and a process that is less than uniform for the industry.

The changes are designed, according to the protection bureau, to help make the sometimes confusing and overwhelming process of buying a home easier to navigate. The trade-off of what is officially known as the TILA-RESPA Integrated Disclosure rule is that the home-buying process itself, while featuring more safeguards for consumers, will take longer.

On the real estate side, Chonci Lekawa, president of Realtors of South Central Kansas and a Wichita, Kansas, Realtor, said the new rules will be a welcome addition to the process.

"This will absolutely ease the process and minimize stress," Lekawa said. "For one, consumers will be able to compare apples to apples with other lenders because all lenders will be using the same documentation -- the loan estimate.

"As it is now, lenders have different ways of offering what we call a 'good faith estimate,' so it can be hard for consumers to read all those."

As for the closing disclosure, Lekawa said the new document will help to eliminate issues like the one that occurred recently when, she said, she didn't even have a HUD-1 statement less than an hour before a scheduled closing.

"I was 45 minutes away from a closing and didn't even know what the exact amount needed for the transaction was," Lekawa said. "With the changes, having that document three days in advance, people won't have to rush from work to the title company and end up being late to closing. People won't have to hustle-hustle because they'll have it in advance and consumers will have time to look it all over before signing.

"This is consumer-driven, but it's going to help make our profession run more smoothly, too."

Lekawa said inexperienced homebuyers sometimes don't see the final documentation of their deal until the actual closing, a development that she said can easily lead to surprises and the possibility of thousands of dollars in unexpected costs.

Longer Closings
The kicker is that the reign of the 30-day closing could become a thing of the past, said J.P. Weigand & Sons Derby Branch Manager Kim Brace, who added that consumers might find new headaches to accompany the blast of transparency.

"For the last 10 years or so, we've been trying to close houses in 30 days or less," Brace said. "That isn't going to happen (after Oct. 3) unless everyone is able to get on track fast and get organized.

"The title companies are telling us that we might want to be trying for a 45-day window. With 45 days, that's going to be a delay in the mind of the consumer and it may lead to a lot of client frustration. Right now, we can be in negotiations until two or three days before a closing."

Brace said the changes will be positive for buyers, though it will likely take some time for everyone -- agents, lenders and title professionals included -- to adjust. Similar to many other regulatory changes that occur today, Brace said there's always a possibility of computer software not working correctly or other glitches popping up.

"The new forms will come with some new deadlines and procedures for the industry," said Mike Brown, senior vice president for Security 1st Title in Wichita. "The whole basis for this is to get information to the consumer. The process that we have in place today will have to become more proactive, and we'll have tighter deadlines."

CFPB spokesman Sam Gilford said the rule changes were first proposed in 2012 and announced in November 2013. The original rollout date was set for Aug. 1 of this year before being pushed back to October.

With industry executives and employees having now had two years or longer to ready themselves, Gilford said the Oct. 3 launch is "firm."

Security 1st President David Armagost said the changes will not affect the company's workforce in Wichita, though he said adding employees because of an increase in workload could be a possibility down the road.

"I think it's too early to know whether or not that's going to be necessary," Armagost said.

McKenzie, the Coldwell Banker Plaza Real Estate CEO, agreed that the effects of the new stipulations might not be seen for a while.

"It's going to bog some things down," McKenzie said. "The CFPB is the new sheriff in town, and it's going to be an interesting exercise.

"What this looks like now and what it looks like in a year, I think will be different. I think there will be some inherent problems found out as we go along. Disclosures are going to be much more user-friendly, but the input on this thing will cause some troubling events."

McKenzie said the biggest problems might come from so-called "chain reaction" transactions, where a buyer can't close on a new home until their old home sells.

"I understand what [the CFPB] is trying to do, but I think this might not be very nimble for the consumer," McKenzie said. "What they've done is they've put a giant Band-Aid on a problem and tried to simplify it, but it isn't all that simple.

"We've instructed all of our people to go 45 days from date of contract to date of closing, and I'm not sure that's going to be enough, but we'll see."

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Copyright (c) 2015, The Wichita Eagle, Wichita, Kan.

Distributed by Tribune News Service.

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