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Are Realtors ready to explain the implementation of the 2015 TILA-RESPA Integrated Disclosure Rule to homebuyers?

According to a recent survey conducted by Wells Fargo, the answer is a resounding “No.”

Here’s a primer…
As part of the implementation of the final rules of the Dodd-Frank Act, there will be a combination of various RESPA and TILA regulations to create all-new disclosure documents designed to be more helpful to consumers, while integrating information from existing documents to reduce the overall number of forms.

Implementation of this new rule impacts two processes of the mortgage transaction and affects everyone involved in real estate and goes into effect October 3rd, 2015*. As Realtors are typically the ones who have the first interaction with homebuyers, its important that they are provided with educational resources to clarify the impact these changes will make upon borrowers in their home loan shopping process and with the scheduling of loan closings when the rule’s implementation can potentially require last minute negotiations for sales contract extensions.

Key Features of the Integrated RESPA/TILA forms include:
-When applying for a loan, the new Loan Estimate (LE) document replaces the Truth-in-Lending Disclosure (TIL) and the Good Faith Estimate (GFE).
-At loan closing, the new Closing Disclosure (CD) replaces the Final TIL and HUD-1 Settlement Form.
-Loan applications taken prior to October 2015*, require the use of the traditional GFE & HUD-1. As such, lenders will be telling closing agents for months to come whether to use the HUD-1 or the new CD at loan closing.

In essence, consumers will receive one document instead of two and implementation of the rule will expire the traditional Good Faith Estimate and the HUD-1 Settlement Form for certain loan transactions, but not all. These rules apply to most closed-end consumer mortgages. They do not apply to home equity lines of credit (HELOCs), reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). Oddly enough, for these loans, the old forms will continue to be used which will create a slew of issues for both lenders and settlement agents.

The Consumer Financial Protection Bureau (CFPB) governs implementation of the rules which define a loan application as the collection of these six items: 1) borrower name, 2) borrower Social Security Number, 3) borrower income, 4) property address, 5) estimate of property value, and 6) mortgage amount requested. Once these six items are collected, lenders are not permitted to require other items before issuing a Loan Estimate, as had been allowed previously before issuing TIL disclosures and/or GFEs.

The Loan Estimate
The Loan Estimate (LE) has been designed as a comparison tool intended to provide financial uniformity for borrowers with which to shop different lenders and aims to provide them with a better way to understand the information being given. Uniformity of the LE throughout the marketplace also applies to timing. The LE must be delivered to the borrower within three business days of taking a loan application. No fees can be collected and no Intent To Proceed (ITP) can be requested until an applicant has received the LE much as is required in today’s operating environment with the Good Faith Estimate.

Effects on Implementation and Unintentional Consequences
In the shopping phase of the mortgage lending process, a borrower traditionally expects to collect various pre-application cost estimates to view loan program options and these cost estimates can then be used to compare the same offerings from different lenders. These estimates are non-binding to the lender because they are based on certain assumptions which include:
-credit score
-property type (single-family, condo, PUD, number of units (1-4)
-value of property
-loan amount
-intended occupancy (owner-occupied, second home, investment)
-debt-to-income ratio (DTI) <= 43%
-date and time of pricing request

A fault of the proposed LE is that it doesn’t list all assumptions the lender has made in its calculation of pricing for clarity of comparison from one lender to another.

To provide a pre-application cost estimate, a lender needs only three of the six components that define a loan application – borrower name, estimate of property value and mortgage loan amount requested. Therefore, providing pre-application cost estimates does not trigger the issuance of regulatory disclosures for loan application.

Today, there is no rule in existence that prohibits a lender from issuing of a pre-application cost estimate prior to a borrower making full loan application. After August 2015, again, there is no rule that will prohibit this activity. Post August 2015, a pre-application estimate is prohibited to look like either the new LE or the existing GFE and will need to include specific language that it is not to be considered an LE.

Overall, the Loan Estimate is intended to give consumers more helpful information about the key features, costs and risks of the loan for which they are applying, but here’s the thing… If lenders begin using the LE in place of designing pre-application cost estimates and if their loan operating systems (LOS) have limitations that simultaneously prohibit the issuance of an LE to only instances where all six components of a loan application are received in order to ensure compliance with the timing of the delivery of the LE to the borrower (as they currently do when issuing a Good Faith Estimate [GFE]), then a borrower will essentially have to make application with a lender in order to receive the Loan Estimate– which is then counterintuitive to the partial intent of the LE which is to compare loan options prior to making application.

Additionally, the TILA/RESPA rule prohibits a lender from requiring that supporting documentation be delivered prior to issuing the new Loan Estimate. As such, in most cases, the LE will be issued based on the unverified information that is provided to a mortgage loan originator (MLO). If borrowers unintentionally misrepresent their income, assets, property type or intended occupancy between one lender and another, the LE’s (and/or pre-application cost estimates) received from each lender will invariably produce different pricing.

The Closing Disclosure
The second component of the RESPA/TILA integrations is the Closing Disclosure and is intended to reduce surprises at the closing table regarding the amount of cash borrowers will need to bring to the closing table. The new Closing Disclosure (CD) is a blend of the existing Truth-in-Lending (TIL) disclosure and the Settlement Statement (HUD-1). It’s important to note that the new CD is governed by the Truth-in-Lending Act (TILA), not the Real Estate Settlement Procedures Act (RESPA). TILA provides different accuracy expectations and enforcement provisions than RESPA, as well as some differences in definitions, with associated risks and penalties that are much more severe than RESPA.

The biggest change that will come from the TILA-RESPA Integrated Disclosure Rule is that the borrower must receive the Closing Disclosure at least three business days prior to consummation as opposed to the current one day requirement of delivery for the HUD-1.

TILA defines consummation to be: “The time that a consumer becomes contractually obligated on a credit transaction.” Each lender is left to decide at what point it considers that a borrower has become contractually obligated on a transaction. Although a 3-day right of rescission rule applies when refinancing owner-occupied properties, many lenders are choosing to define the consummation date as the date the borrower signs the loan documents even though technically, the borrower still has three days to rescind the offer.

While its affect is no doubt a positive for all parties, its implementation is creating major challenges for lenders and settlement agents alike. Traditionally, settlement agents prepare the HUD-1 Settlement Statement. In this new environment where lenders are required to show compliance of delivery of the Closing Disclosure to the borrower, there is much debate and concern over who is responsible for the accuracy of the CD. Lenders can only guarantee their fees. Settlement agents are responsible for ensuring all other fees are accurately represented on the closing statement. This marriage of responsibilities is requiring lenders and settlement agents to open better lines of communication much earlier in the process.

RESPA-TILA Integration Details
The new Loan Estimate consists of three pages and the Closing Disclosure consists of five pages.  For borrowers and Realtors, to view the proposed new disclosures, visit the Consumer Financial Protection Bureau (CFPB) homepage and scroll to the Participate tab and then select the dropdown for Mortgages. For lenders, the CFPB has also issued a detailed 96 page explanation of these two new forms which can be viewed online at Guide to the Loan Estimate and Closing Disclosure Forms.

 

*Updated July 2015 to reflect the CFPB’s decision to delay implementation from August to October 2015.

Real Estate Agents Demand Local Lenders

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In an article dated August 22, 2014, Inside Mortgage Trends reports results from the latest Campbell/Inside Mortgage Finance Housing Pulse Tracking Survey to show that real estate agents strongly prefer local lenders and a Florida real estate agent was quoted as suggesting to the seller a requirement for all offers with financing contingencies to go through a local lender.

Agents report that closing delays are more common from a call center lender than from a lender with a local office due to a general lack of responsiveness, underwriting delays, lack of knowledge of local lending laws, and inaccessibility of lender contacts with settlements taking place after hours. When the time requirements of the sales contract are not respected, buyers are at risk of losing their earnest money deposits.

Tom Popik, research director of Campbell Surveys confirms, “Agents crave information and certainty of closing.” A Michigan real estate agent is reported to contact the buyer’s lender for access to information regarding the timeline of the underwriting process and expectations for meeting closing dates. To leverage against delays, he includes a contract addendum leaving his seller’s with “an out after a certain period.”

Selling agents are said to encourage potential buyers to avoid call center lenders altogether or as a safety net, submit a second loan application to a local lender. Additionally, when a listing receives multiple offers, sellers are encouraged by their agents to “shy away from offers financed by a call center lender.”

How can call center lenders do a better job upfront of calming all parties? By issuing true pre-approvals where credit, income, and assets have been reviewed and approved by a decision maker and by communicating clear closing expectations once a property appraisal has been received and reviewed.