“The nine most terrifying words in the English language are: I’m from the government, and I’m here to help” – Ronald Reagan
If your clients are asking why the sales process of their home is so different than the last time they traded residences, tell them this: the single largest implementation challenge to hit the housing industry in decades is finally upon us.
“It’s massive. It involves real-estate agents, title companies, consumers, lenders, everyone,” says David Stevens, President and CEO of the Mortgage Bankers Association.
The challenge is a new federal regulation that created the Consumer Financial Protection Bureau (CFPB). The law is designed to protect consumers and help them better understand the terms of their mortgage. The reform is a direct result of the mortgage crisis that ensued during the last housing boom, when some borrowers agreed to loan terms they later found they didn’t clearly understand.
The new rules regulate most new home loans (not cash transactions though). They effect all mortgages where the loan applications were taken on or after October 3, 2015. If the consumer applied for the loan prior to October 3, the old rules apply even if closing occurs later. There are new forms and consumer identity protections that will change the way Realtors, lenders and title companies do business.
Two Forms You Need to Know:
The two most important form changes that Realtors and consumers need to know about are the Loan Estimate and the Closing Disclosure. The Loan Estimate form replaces the previous Good Faith Estimate. Lenders will be required to provide the Loan Estimate within three business days after the borrower applies for the loan. While this duty falls on lenders, it is extremely important that your buyers use reliable lenders that work diligently to ensure deadlines are met and delays are avoided. Putting your buyers in contact with a lender very early in the process is key, even before a contract is written, preferably. It is equally as important now that listing agents also question where buyers are in the lending process and don’t just assume that all lenders are up to the challenge.
The second major form change will be the replacement of the traditional settlement statement with the new Closing Disclosure form. The “CD”, as many are calling it, combines much of the information from the outgoing HUD-1 and Truth in Lending. Although most lenders will continue to lean on title companies to prepare the new form, lenders will now be legally responsible for ensuring that the Closing Disclosure is delivered to the buyer no less than three business days prior to closing. Many lenders are taking an even more conservative approach requiring that it be mailed to the consumer seven to ten days prior to closing. With these new disclosure delivery periods, it is easy to see how some contract closing times will need to be pushed farther out. Many national lenders have stated that the new closing timeframe should be bumped to 45-60 days while some local lenders are less intimidated by the new deadlines and have said their timing won’t change.
BOTTOM LINE: talk with your lenders now and ask what kind of timing they are anticipating.
The bulk of the work in implementing the changes rests on mortgage brokers and title companies. For that reason, title companies and lenders have offered vigorous training for Dallas area Realtors.
“We have worked with a number of Dallas real estate offices and their managers in creating classes and training so that we are all prepared,” says Devin Rambie, LegacyTexas Title’s Director of Business Development. “Our underwriters have been terrific partners in assisting us in educating our Realtor. It has been a long road, but we are ready for October 3.”
LegacyTexas Title has been working for more than two years to ensure their clients’ transition to the CFPB is as smooth and painless as possible, Devin added. LegacyTexas Title has also provided local agents with materials like “Top 10 Things Realtors Need to Know” and “Top 10 Things to Ask Your Lenders” – sort of “cheat-sheets” to navigate agents through the changes.
It is more important than ever for agents to lead their buyers to a lender and a title company that can handle the settlement process smoothly, efficiently and that is fully aware of the new requirements.
Devin also strongly suggests that agents share the new legislation with their clients, who may find buying a home a totally different process than the last time they were in the marketplace.
“I would email them this story, these forms,” she advises. “It will actually help you help your clients be better prepared.”
So what does a Realtor need to know to survive the CFPB?
Timely communication with the lender and title company is going to be of paramount importance. Most are advising that all contract amendments, HOA resale certificates, home warranty choices, commission authorizations, and any other documents needed to prepare the Closing Disclosure be to the title company no later than 14 days before closing. The days of delivering the “forgotten amendment” to the title company hours before closing are gone.
Realtors should also be aware of other key changes concerning consumer identity protections. The new law requires lenders and title companies to work diligently to ensure non-public consumer information stays private. This means lenders and title companies will now be using encrypted/secure emails (think login and passwords) for all sensitive information including loan and contract details. How the Realtors receive information from title companies and lenders is also going to change. Because of the steep penalties and fines, some lenders are taking a conservative approach to what if any information may be sent to the Realtors.
“It will be interesting to see how this all evolves,” says Laurence Henry, Attorney and President of LegacyTexas Title. “Many national lenders have told us and our underwriters that they will not allow the title companies to deliver the Closing Disclosures directly to the Realtors.”
At least initially, Realtors may have to have their clients forward the forms to them to review. The Texas Association of Realtors created a form that authorizes title companies and lenders to deliver the closing statement and other forms directly to the Realtors, but as lenders and title companies fear the wrath of the federal government, these authorizations might not be relied upon until clearer directives on such delivery becomes available.
For the consumer, the biggest impact could be a delayed closing date. Lenders will certainly be acting more cautiously, as the liability for non-compliance falls heavily upon them.
“While this all seems scary, it isn’t the end of the world,” Laurence adds. “Get with a good lender, a good title company and manage your clients’ expectations. Extra steps like longer closing periods and added days for a leaseback, may also aid in lessening the heartache of the initial hurdles.”
For more information about CPFB and how it affects your business, contact Devin Rambie at LegacyTexas Title Co.