Big and potentially disruptive changes are coming to the mortgage and real estate world
starting October 3, courtesy of the Consumer Financial Protection Bureau (CFPB).
These
changes are important, and failure to understand the consequences of non-compliance
are going to blow deals, cost some buyers their earnest money and will likely spark all kinds of new litigation.
As with any new legislation, there will be unintended consequences.
Let’s talk
about the details, because they are important.
Historically,
lenders have relied on two key documents at closing to explain costs and fees
to buyers… the Truth-in-Lending (TIL) disclosure and the Real Estate Settlement
Procedures Act (RESPA) disclosure.
Starting October 3, these documents will go away and be replaced by a new “simplified”
form which better discloses costs and fees.
From what I can tell, the new form is an improvement. Hat tip to CFPB.
Now for the
hammer… the new regulations include disclosure triggers than cannot be waived,
modified or amended. Most critically,
buyers with mortgage financing must now have their CFPB-mandated disclosure
forms with all closing costs and fees delivered electronically (with proof of
receipt) not less than THREE business days prior to closing. (Today, it is not uncommon for buyers to see these final figures for the first time at the closing table)
If you don’t
receive the electronic form three business days prior to closing, you don’t
close. No exceptions.
If you
receive your closing documents by PDF, instead of through an electronic program
with a confirmation of receipt feature, it adds another three business days to
the process… meaning that a PDF copy of your closing documents would require
SIX days advance notice, or you don’t close.
Same for
documents delivered by mail… they must be sent out six business days prior to
closing, and acknowledged at least three business days prior to closing.
So what’s
the big deal if you don’t close on time?
Not much, other than defaulting on your contract, blowing your deal and potentially losing your earnest money!
If you
commit $5,000 in earnest money on a home with a closing date of October 30…
then complete your inspections, appraisal and obtain final loan approval… but
for whatever reason the lender cannot produce your final closing document
package until October 28… you are in huge trouble, because legally you cannot
close (and the title company will not close the deal) until three business days
have elapsed, which would be no earlier than October 31.
Problem is,
the contract says you’re closing October 30.
If the seller wants to, he can keep your earnest money, cancel your
contract and laugh all the way to the bank.
At which time you will hire a lawyer, sue your lender and go nuts over
the government’s desire to “protect you”.
So what if
your earnest money is $50k, instead of $5k?
Too bad, it’s gone.
What if you’re
trying to sell your home so you can purchase an upleg property, with both deals
scheduled to close on the same day? If
deal #1 has a compliance issue (at absolutely no fault of your own) and can’t
close, then deal #2 is dead, too. Both
buyers potentially lose their earnest money. Call it the “Litigators
Full Employment Act of 2015”.
Realistically,
the new regulations will add six to ten business days to the time required to
do a loan, because there are also new “front end”
disclosure requirements that the lender must meet.
Going forward, when a
buyer applies for financing, the lender will have three days to get initial
disclosures to the buyer, with origination fees that cannot change after
acceptance and other new “frozen” fees like appraisal and discount points. Once accepted, these fees are firm, or the
entire re-disclosure process must start
over.
When the
lender sends out the initial disclosure package, the borrower will have 10 days
to accept the terms. If the buyer doesn’t
sign an acknowledgement accepting the terms, the lender must generate new
disclosures and the process starts over.
So here’s
some of how CFPB will change your real estate transaction.
First, the
disclosure requirements and notification rules mean mortgage companies are
going to have to hire more people. That
will raise costs.
Second,
because appraisal fees cannot change once quoted (and some appraisals are more
complicated than others), look for these fees to rise overall. And look for appraisers to turn down
challenging assignments, unless a higher appraisal fee has been quoted up
front.
Third, look
for train wrecks, especially in the first few months. Lenders will have trouble meeting these
deadlines, and both Fannie Mae and Freddie Mac have made it clear that any loan
which violates CFPB protocols will be ineligible for purchase on the secondary market. So unless your lender has a few million dollars tucked away in an office drawer, don’t be looking for exceptions to these
rules to be made. It isn’t happening.
For those
buyers who like to shop lenders during a transaction, have at it. Just be totally prepared to lose your earnest
money and the house you pledged it against if your lender can’t perform. It’s going to happen.
One
unintended consequence of the government’s desire to “protect” those getting a
mortgage loan? Cash buyers will have
even more command of the market, as sellers look to eliminate the new layers of
risk that CFBP will introduce.
For agents,
there are ways to adjust to the new CFBP rules.
But they, too, are going to involve risk. Rentbacks will become more common negotiating
ploys, to ensure that sellers purchasing upleg homes are not put at risk by
CFBP delays on the sale of their existing homes.
Sellers' agents are going to demand that the Loan Objection Deadline come earlier in the process, to ensure that earnest money goes "hard" before CFBP disclosure deadlines kick in at the end of the contract period.
Big earnest
money deposits are going to become riskier.
And buyers
who have “loyalty issues” (those who like to shop lenders while under contract)
are going to be playing with fire if they switch mortgage companies once under contract.
The bottom
line is what used to be a 30 day contract needs to become a 40 day contract
(which, by the way, increases the buyer’s cost of locking in an interest rate). Appraisals and inspections
need to be ordered and performed quickly after going under contract, to ensure that there’s room in the
back end of the contract process for the CFBP’s mandated disclosure
periods. “Domino transactions” (closing
on one house to buy another) will be far riskier, because of the increased
potential for unforeseen delays caused by the new disclosure timeframes and
requirements.
Will we
survive the new CFBP rules? Yes, we will. But we will have to adjust.
Navigating the new minefield of disclosure dates and deadlines will claim casualties. Some deals won’t
close. There will be collateral damage,
at least until everyone staffs up and adapts procedures to account for the new
rules.
If you’re
planning to finance a home after October 3, you need to have a candid
conversation with your lender about CFBP and what it means. And when that email shows up in your inbox
with your mortgage disclosure documents, you better not wait around to open it
and confirm receipt.
Because you,
too, are now on the clock.
