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Dodd-Frank effect on closings after October 3rd, 2015

There is a lot of fuss on the new home loan rules set forth by Dodd-Frank Act. Starting October 3, 2015. “Know Before You Owe” initiative aims to simplify loan disclosures and help borrowers better understand their mortgage terms. Homebuyers might see longer loan processing periods, but they’ll also be less likely to experience last-minute loan drama

However, there’s been quite a bit of ranting around it.

Some of the most fundamental changes are:

  • Four closing documents will be merged into two. Good Faith Estimate and Truth in Lending disclosures will be eliminated and combined into a Loan Estimate formTruth in Lending disclosure and HUD-1 Settlement are being replaced by Closing Disclosure form.
  • Under new rules, lenders must provide closing documents to both parties three business days before the closing date, to give buyers a chance to read them, double check information and make sure they are aligned with what they expected.
  • You’ll receive the loan estimate within three days of providing basic information to each potential lender

PROS

It is appalling that under current system, buyers often have only few hours to wade through complex legal documents that represent the largest purchase most people will ever make. With numbers making their first appearance right at the closing table, Buyers do not have enough time to think them through and compare with what they were advised at beginning of process. A 3-day window gives Buyers opportunity to think through the numbers.

About my personal experience: We decided to try a new attorney charging really low fees. Idea was to cut down recurring attorney costs on recurring purchases. At the Settlement agent’s office, we saw the HUD-1 for the first time. The title related fees seemed quite high (mind you, I didn’t say title insurance), but we did not have any previous documents to compare them with. With lots of questions in mind, we handed them the check, with an understanding that the Settlement office would only deposit it after getting a green light from us.

My immediate stop was at my office to compare the fees. A lot of current title fees were unnecessary and about $ 400 more than what I had paid my previous attorney. Ultimately, the current attorney who I thought was $ 600 cheap turned out to be only $ 150-200 cheap (including his title expenses)!

Low attorney fees was a sheer marketing gimmick (he got his money by charging us higher title fees). But we were at such a late stage of the proceedings that we just decided to move on with the purchase. Had we got a 3-day window to check, things would have been different.

CONS

In some states (closing table states), Agents or Principals have to be physically present for closing. Clients, agents and attorneys are accustomed to routinely making changes at the closing table and still closing the sale on same day. The new three-day waiting period will severely limit this practice for items covered in the TRID documents.

Breather: New Jersey is an ‘Escrow State’ where documents and signatures can be submitted few days prior to closing. We may not be heavily impacted.

When transactions don’t close on time, it’s common for one or more of the principals to be stuck with furniture on a moving van and nowhere to go. Who pays the hotel bills? What if an error retriggers the 3 day waiting period? Can you allow the Buyers to move in quickly with a rental agreement?

There are situations when a principal has to close by a certain date to take advantage of tax breaks on sale of their primary residence or where 1031 tax deferred exchange in involved! The lost tax benefit can run into thousands of dollars!

Delay could also mean losing on to a locked interest rate.

CFBP (Consumer Financial Protection Bureau) clarifications:

However, the CFBP had indicated that only three changes would require a new three-day review:

  • APR increases by more than 1/8th of a percent for a fixed rate loan or 1/4th of a percent for adjustable rate loan. A decrease will not require a new 3-day review
  • A prepayment penalty is added, making it expensive to refinance or sell
  • The basic loan product changes, such as a switch from fixed to adjustable rate or to a loan with interest-only payments.

Typos, credits that are given because of unexpected discoveries at walk-through, or changes in real estate commissions, taxes, utilities, proration and the amount paid to escrow will not require a new 3-day review.

Well, then really, are the three changes mentioned above worth the kind of hoopla?

What can you do?

The “Know Before You Owe” disclosure rule may simplify mortgage paperwork, but it doesn’t simplify the mortgage process itself. If you’re buying a house this fall, prepare for a longer closing process. You might want to adjust the term of your rate lock accordingly. And keep the lines of communication open with your lender and seller to avoid closing roadblocks.

Delays, even short ones, can put a buyer at a disadvantage to cash bidders in hot real estate markets. But understanding your loan terms can save you from headaches later.

Good luck!

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