September 30, 2015

CFPB 'Know Before You Owe' Rules Finally Go Into Effect

After several postponements, federal regulators will begin enforcing new rules for home mortgages in October. The new disclosures are a seismic change to the process of shopping for a loan and closing on it.

Mortgage business not ready for Oct. 3 and beyond?
Colloquially phrased as "Know Before You Owe," the changes merge disclosure requirements governed by the Truth in Lending Act and Real Estate Settlement and Procedures Act. The mortgage industry shorthand for that alphabet soup is TRID - which stands for TILA-RESPA Integrated Disclosure. TRID officially goes into effect on Saturday, Oct. 3. There's widespread concern at realties and the offices of closing attorneys that the industry isn't ready.

But Richard Cordray, director of the Consumer Financial Protection Bureau, sought to allay fears that regulators would pounce immediately on improper use of the new forms.

"There will be time for them to work to get it right," Cordray told a House committee to which he'd been called to testify, according to American Banker. "They don't have to be perfect the first day. There will be a diagnostic approach to this."

Paperwork reduced; waiting times increase
The changes are monumental, both for borrowers, lawyers and real estate professionals. Let's take a closer look at them.

At a prosaic level, the changes reduce four documents down to just two, as the Wall Street Journal summarized. Gone are the initial Truth-in-Lending Statement and Good Faith Estimate. In their place comes the Loan Estimate.

"There's literally no way to even compare the [old] Good Faith Estimate and the Loan Estimate," Bank of America's Bob Kelly told the WSJ. "The document has taken on such a dramatic change, but the changes are very consumer-friendly."

New forms 'less confusing, more concise'
Lenders must provide would-be borrowers the Loan Estimate within 72 hours of applying for the mortgage. It is designed to help consumers more easily differentiate between the terms of various loan offers they may receive. One key feature of the Loan Estimate is that it shows the total dollars the borrower would pay over the life of the loan as a percentage of the amount loaned.

At closing, another two documents are combined into one. The old process required a Settlement Statement (aka HUD-1) and the final Truth-in-Lending Statement. On and after Oct. 3, a single Closing Disclosure takes their place. It streamlines information by, for instance, clearly itemizing escrow costs.

"The forms are much less confusing and more concise," the president of Connecticut's Total Mortgage Services, John Walsh, told the WSJ.

Key elements not working
But while some loan pros say they're happy with the slimming down of the number of forms, grave concerns remain among bankers about the industry's readiness. Information technology vendors have failed to update necessary software, for instance.

"Even when systems are delivered in a timely fashion," the American Bankers Association wrote the Tuesday before the reforms went into effect, "critical elements of TRID compliance programs are often not completely operational, or are malfunctioning."

Unintended consequences?
As with any new regulation, observers are watching for negative knock-on effects. Prime among these are concerns that the three-day waiting periods may derail significant numbers of mortgage deals. One scenario highlighted by the WSJ is that the new rules could prove a boon for the cash buyers making such an impact on urban real estate markets around the country. Any glitches with would-be homeowners having to finance could mean more properties in the hands of cash-in-hand investors, many of them from overseas.

As the new Know Before You Owe rules play out, bankers concerned with what this all means for their loan portfolio can turn to loan sale advisory firm Garnet Capital Advisors.