We know in the real estate and lending industry there have been a lot of big changes in the last few years because of Dodd-Frank Legislation. Big changes are scheduled for October 3rd related to new real estate closing regulations and documents associated with the closing process.
The Consumer Finance Protection Bureau (CFPB) has issued new rules requiring an easier-to-use mortgage disclosure process and forms. The new “Know Before you Owe” mortgage forms will replace the HUD 1 we are all used to. This change is intended to help consumers understand their options, choose the option that is best for them and avoid costly surprises at closing. To make sure that these disclosures where an improvement to the existing process the CFPB involved the individuals that would actually use the new forms. Consumers, lenders, mortgage brokers and settlement agents (Escrow or closing company) were asked for input.
First there are some new terms we need to get accustomed to:
- Settlement Agent = Escrow
- Creditor = Lender
- Consumer = Borrower
- Consummation Day = the day loan docs are signed
- Settlement Day = Day Escrow Closes
- LE = Loan Estimate (replaces the GFE – Good Faith Estimate)
- CD= Closing Disclosure (replaces HUD 1)
Let’s look a little more in depth at the time requirements that accompany the LE – Lending Estimate and CD – Closing Disclosure. The LE and DC are the two forms that you will now see in a real estate transaction that requires a loan (loans that are excluded from the new rule are Reverse Mortgages, HELOC’s, Mobile Homes and creditors who originate less than 5 loans per year).
The “LE” Loan Estimate: will be provided within three business days after a consumer (formally borrower) submits a loan application.
The “CD” Closing Disclosure: will need to be received by the consumer three business days before the loan is scheduled to close.
The other BIG consideration is the length of the process is now expected to extend the normal closing process. Most transactions will now require 45 to 60 days. The main reason for this delay is twofold: 1) once the lender has given the buyer a closing disclosure CD there will be a 3 to 7 business day waiting period for the consumer to review the CD. The timing is dependent on the way the CD is delivered to the buyer.
In addition all closing costs will be considered final once the CD has been issued. Escrow fees, title fees, messenger’s fees, payment of all bills, etc. cannot change without causing a new CD to be drawn up and the review period starting all over again.
Seven days prior to the issuance of the CD all contingencies, walk-through and repairs will need to be completed. Any last minute negotiations involving credits to the consumer (credit for repairs, credit toward closing cost not disclosed earlier, change in the sale price due to lower appraisal, etc. will result in a redrawing of the CD and the waiting period starting again.
What does this mean to the investor? If the investor is selling a property (i.e.: Fix and Flip) your holding period will be longer if the buyer is getting a loan. We have to now expect closings to be 15 to 30 days longer. That directly converts to dollars out of your pocket. The only thing we can do is plan for it and get deeper discounts on the buy end.
Diana D. Hill