For some home lenders and borrowers, the 2015 holiday season hasn’t been so jolly, as federal home loan disclosure rules designed to give borrowers more time to review documents are having the unintended effect of increasing closing times for some home loans and socking some borrowers with higher lending fees.
“The new rules are the reason I drink,” said Joe Parsons, a senior loan officer at mortgage lender PFS Funding in Dublin, Calif. Parsons said because the new federal home disclosure rules are now extending closings by a week or more, some of his clients have to pay extra to lock in the interest rate on their home loans for 45 or even 60 days, instead of the typical 30-day period that it takes to close a loan.
That’s because getting the required loan documents together under the new rules and disclosed to the borrower in time requires more from lenders, title companies, and settlement agents, and as a result it’s sometimes costing borrowers as much as $300 to $500 to hold their interest rate for their home loan longer depending on the size of the loan, Parsons said. “We’ve got more moving parts than ever before. And if a loan estimate isn’t perfect down to the penny, then the loan gets re-disclosed” and the closing delayed.
Parsons pointed to another client he’s trying to get into a home by Christmas, but because he says the federal loan disclosure rules are increasing the time to close, the developer of the home is threatening to charge his client $500 a day for each day the deal isn’t completed. “We’re finding new land mines everywhere” when it comes to closing loans, he said.
The delays are stemming from a federal government rule by the Consumer Financial Protection Bureau that as of Oct. 3 required that loan disclosure documents must combine the information required in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Under the new rule change, known as the “Know Before You Owe” rule, or the TILA-RESPA Integrated Disclosure (TRID) regulation, consumers must be given the new combined Loan Estimate (LE) with all the charges, fees and line items three days before the closing, rather than at the closing on the HUD-1 form.
The three-day period was designed to give borrowers more time to go over the loan documents with their real-estate agent or attorney before signing. The grace period was intended to combat abuses that occurred during the real estate boom in the past decade, as buyers came to closings unaware of the blizzard of documents they’d be signing, which made it all too easy for unscrupulous lenders, brokers or title companies to stick hidden fees in the closing documents or change the loan rates at the last minute.
For Benjamin Niernberg, a title insurer with Proper Title in Northbrook, Ill., November was a lot less thankful as well, thanks to TRID, as about 25% of the 250 home loan closings for new purchases he typically handles in a month were delayed or forced to be rescheduled, compared with only about 3% to 4% of loans before the new TRID rules went into effect, he said. “The industry thought they were ready for the new rules, but they weren’t,” he said.
Of about 2,000 purchase mortgage loans each month, 72% of Fannie Mae and Freddie Mac-backed mortgages with a down payment of at least 20% closed on time in November, down from a 73.6% share in October, when the TRID rules when into effect. This is based on a three-month moving average, and according to a joint survey by Washington, D.C-based Campbell Surveys and Inside Mortgage Finance, a Bethesda, Md. based mortgage research company, “Closing time(s) are showing minor effects of TRID,” Tom Popik, the research director of Campbell Surveys, said in a statement.
Nearly all of the loan types had a longer total average closing time in November compared with October, the survey said. Fannie Mae and Freddie Mac-backed purchase mortgages with down payments of 20% or more closed in an average of 43.6 days in November, up from 41.9 days the previous month, Campbell Surveys and Inside Mortgage Finance reported.
In October, CFPB director Richard Cordray admitted to mortgage lenders that the new rules were likely to have an impact on closings. “It has become apparent that the implementation process was not as smooth as we would have hoped,” he said about the rollout of the “Know Before You Owe” rule. Cordray didn’t directly lay the blame over the ragged TRID rollout on the lenders, instead pointing the finger at the industry’s various software vendors that supply banks and lenders with key borrower data before the loan is closed.
Moira Vahey, a CFPB spokeswoman, said via e-mail that the agency didn’t have an immediate comment on the delays.
The CFPB says that consumers will benefit from the rule changes because any change in the loan estimate that’s more than one-eighth of a percent (12.5 basis points) in the three-day period for a fixed-rate loan or a quarter of a percent (25 basis points) for a variable rate loan — or changes or additions in other fees, such as an addition of a prepayment penalty — requires an entirely new disclosure period. However, a decrease in the interest rate or fees won’t cause a delay.
More than 300 members of Congress also are pushing the CFPB director to delay enforcement of the rule until the end of this year and the Mortgage Bankers Association (MBA), a lender trade group, wants that pushed out even further, until as late as February 2016.
Rob Chrisman, a former mortgage executive in San Rafael, Calif., who runs his own consulting business, Chrisman LLC, says the delays will hurt efforts to lure millennial borrowers off the fence and into the mortgage market. “It’s really going to impact the first-time home buyer,” he said. “These young consumers are used to being able to complete a financial transaction with a few clicks of their mouse and now it’s going to take longer.”
Still, mortgage industry insiders like Proper Title’s Niernberg say that by early next year, the worst loan closing delays for consumers will be a fading memory. “Has TRID been disruptive? Sure,” he said. “Was it worse than we thought? No.”