If you’re a homeowner, then you know how confusing the mortgage disclosure paperwork can be. Starting October 3, the government will require that updated disclosure documents are given to those applying for a mortgage. The Consumer Financial Protection Bureau’s Know Before You Owe mortgage disclosure rule will streamline the number of disclosure forms from four to two, among other changes.
Unfortunately, despite the updates, some pitfalls come with the new disclosure rules. The Cheat Sheet spoke with Holden Lewis, Bankrate.com’s mortgage analyst to get more information on the updates and how they will affect consumers.
The Cheat Sheet: Why will the government be requiring new disclosure documents?
Holden Lewis: The new mortgage disclosure documents are required by the Dodd-Frank Act, which mandated a streamlining of mortgage disclosures to consumers. Two laws — the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) — mandate different sets of mortgage disclosures. Until Saturday, mortgage borrowers get four documents. When they apply, they get a Good Faith Estimate (required by RESPA) and a TILA disclosure. Before closing, they get a HUD-1 statement of closing costs (required by RESPA) and a second TILA disclosure. Starting Saturday, the RESPA and TILA disclosures will be integrated and simplified, satisfying the Dodd-Frank requirement. Mortgage borrowers will get a Loan Estimate within three days of applying, and a Closing Disclosure three days (or more) before closing.
CS: What are some of the major pitfalls?
HL: The biggest potential pitfall is that the lender will have to raise the interest rate a day or two before closing, or the loan will be switched from a fixed rate to an adjustable-rate mortgage. In such a material change in the loan, the lender would have to provide a new Closing Disclosure. Because the Closing Disclosure has to be delivered at least three days before closing, a major, late change in the loan could trigger a new three-day waiting period.
CS: What are some of the benefits of the new documents?
HL: There are a lot of benefits to the new documents. First, the Loan Estimate and Closing Disclosure are easier to understand than the Good Faith Estimate and especially the HUD-1. There’s a “comparisons” section in the Loan Estimate that truly, I think, makes it simpler to compare mortgage offers. The Closing Disclosure is much easier to understand than the HUD-1, and it’s easier to compare side-by-side with the Loan Estimate to make sure the borrower gets the loan that was promised. This should make businesses more competitive because the mortgage offers will be clearer. That means that borrowers will be able to compare offers more easily. And that means increased competition, which could keep a lid on costs.
CS: Anything else to add?
HL: When I first learned that the new disclosures would be required, I thought this was a matter of changing a few forms and that it wasn’t a big deal for lenders. But it was a huge deal for lenders, and title companies, too. They had to rewrite software from the ground up to implement these changes. For lenders, it took more than a year, and a lot of money and staff time to make these changes in software and processes, and to train employees.