Since the Great Recession, the mortgage landscape has experienced sweeping changes to ensure consumers are protected against what led to the recession. In 2010, legislation passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, implementing the biggest changes to the mortgage industry since the 1930s.
This August, change is coming once again.
This change comes in the form of the Integrated Truth in Lending and Real Estate Settlement Procedures Act disclosures (TRID). With this new regulation, consumers will be provided with easier-to-understand disclosures. But as with other parts of the Dodd-Frank Act, there will be unforeseen consequences.
The Dodd-Frank Act, which introduced Ability to Repay and Qualified Mortgage Standards, was a noble concept with unintended side effects. Qualified Mortgage forced lenders to adhere to certain costs that cause some qualified buyers with low down payments on smaller homes to lose options, or not get a loan because their mortgage could not meet the qualified mortgage definition. The Ability to Repay has also eliminated some qualified buyers based on new rules on how types of income can be classified while also eliminating some income sources from consideration in their ability to pay.
TRID essentially makes two changes to the existing mortgage process. One change is that TRID requires consumers be given enhanced good faith estimates, which list the costs a customer can expect to incur for their loan. They detail the interest rate, loan payment and cost of credit expressed as the annual percentage rate. These new forms improve on the current forms, which are difficult to follow for both consumers and mortgage industry professionals.
The Consumer Financial Protection Bureau, the independent government agency responsible for consumer protection in the credit marketplace, has undertaken comprehensive consumer testing to make the good-faith-estimate language more understandable. The revised forms list loan terms, payments and closing costs front and center, and in plain language. Lenders are required to quote fees more accurately than before. Both these facets of the new regulations are good for the consumer.
But, it’s the second change that could cause problems.
A new Closing Disclosure form, replacing the old Final Truth in Lending and HUD-1 forms, will be part of the process. The Closing Disclosure form gives consumers information about the loan terms and closing cost, and compares the cost in the loan estimate with the final cost. The potential sticking point concerns time frame.
The customer is required to get the form at least three days before the loan can be closed. If changes are made to the documents that affect the loan program, prepayment or annual percentage rate, the customer must get a new disclosure and the three-day wait cycle starts again.
It’s possible that these changes to timing could affect both buyers and sellers in common real estate transactions. Adding a minimum three-day delay may confuse consumers who’ve already agreed to the change causing the delay. Then there are increased costs the new regulation will bring to the transaction.
In a recent Fannie Mae survey, mortgage lenders reported increased compliance costs of nearly 30 percent compared with the previous year. Those costs will be passed to the consumer, putting up another barrier to consumers’ ability to complete the mortgage process.
Streamlined information flow is good for the industry, and most everyone agrees that the intent of the new Closing Disclosure provision is a good thing. Adding a provision that throws off the critical timing of closing on and moving into a home isn’t good for mortgage lenders or consumers. Increasing the costs for everyone concerned has potential to put some lenders out of business, and some qualified customers out of the housing market.
The goal of mortgage lenders is putting people together with homes. As that process becomes more time intensive with the risk of critical deadlines being missed, there will be consequences for both lenders and consumers, which is why lenders must prepare themselves and their clients for these potential setbacks.