Ok, it appears we are moving from a RESPA rash to a TRID which is not to be confused with a Chinese organized crime organization TRIAD. All joking aside there are more changes coming to the mortgage industry on the horizon that could change the playing field one more time. Some of these changes are a long time coming and others simply add time to an already stressed transactional time. To fully understand what is going to happen when you apply for a mortgage come October 2015 I will have to go back and first explain how this business has been done in the past then move to the new changes.
In the good old days of Mortgage Lending we would meet with a potential customer get their income, bills, and necessary documentation that fit what their financial picture would dictate. This would generally include pay stubs, W2s, bank statement and any explanations of derogatory credit. During that time we would determine how much of a loan they will qualify for. We would also do a good faith estimate of closing costs to the best of our ability knowing that rates change every day. This was to determine that the client actually had the funds they needed to close before going looking for a home. By providing that estimate, loan officers were not held to the exact terms of the estimate. It was always a given that you would come close to what you quoted even before the client found a home and you would do your best to get as close to that number as possible if for nothing else but to make the client happy with your services for future referral business. A good loan officer would keep their clients informed as interest rates changed up or down, the costs would generally stay the same during the house hunting process. Then when they did find a house and made an offer and it was accepted then the Loan Officer would drill down the numbers to get as close as they could to a number that will be the same at the end of the transaction. If a Loan Officer did this wrong and it ended up costing the borrower more money than they expected you not only heard from your client, but you also heard from your referral source (generally the Realtor) that you did a poor job and would not be getting any more referral business. This simple market transaction kept all the long term good Loan Officers honest and true to their quotes.
Well In the early 2000’s, specifically in the years 2003-2006, when the Real Estate Market was red hot, new Loan Officers were entering into the business with short term gains on their minds and were not looking after the best interests of the client. They were making money hand over fist at the client’s expense. This was the beginning of the end for the Old way of doing business. Some, so-called Loan Officers at the time were not giving the potential buyers any direction on costs and fees of the transaction and the clients didn’t question them as the Real Estate Market was going up every day and they had the pressure of getting a home at all costs so they too could realize unrealistic gains on their investment. We know the outcome of that, the recession. Loan Officers took the brunt of the blame for the mortgage system collapse although they were only doing what the market dictated and some went so far to violate the RESPA laws for personal gain. RESPA or the Real Estate Settlements and Procedure Act was set up in 1974 designed to provide some outlines and rules for lenders on the way they should treat and disclose to consumers costs and fees and what were allowable and non-allowable fees in a Real Estate Transaction. This Act was overseen by the Department of Housing and Urban Development or HUD. During the boom years in Real Estate things were moving so fast that Originators were coming in and out of the Market so fast regulators could not catch up with them so there was only limited policing of the industry.
This all Changed in 2008 with the Dodd-Frank Act that set new ground rules for additional regulation in the mortgage business. The Act was to be instituted over a period time with layering of rules. We first saw Loan Officers have to be licensed starting in 2010 with the National Mortgage Licensing System (NMLS). The rules also changed, in that, the loan officer now became culpable for their actions. In the past, it was the company that got stuck holding the bag if a customer sued them for fraud or misrepresentation. The Act also set forth underwriting laws, as opposed to rules, and those laws stated maximum loan to value ratios, borrower qualification requirements, disclosure requirements and much more. All these new rules and laws have been phased into the business over the last 5 years.
This brings us to date with the nest big change to the industry, Truth in lending, RESPA, Integrated Disclosure. If you recall the old way of disclosing to the borrower was to provide an upfront “good faith estimate”, now it has become more of a contract. When a Loan officer provides his or her estimate of costs upfront it now cannot vary .125 of a percent or it will trigger re-disclosure or the company has to absorb the difference in the quote from the actual costs. If the buyer changes his or her mind on the interest rate they wish to take it will trigger what is called a change in circumstance that the borrower will have to sign before the loan can be approved. Loan Officer Commissions now cannot change in today’s world and the compensation cannot be tied to the interest rate at all in efforts to further protect the consumer. Currently, a Loan Officer must provide a good faith estimate of costs that is 4 pages and is not an accurate depiction of the costs their client will end up paying. The current good faith estimate form need not be signed by the borrower it just needs to be delivered to the client 3 days after the application. Currently, our disclosure package that goes out the client is around 120 pages in length which is full of confusing information to a consumer. A good Loan Officer, in today’s Real Estate world, still should be looking for referral business and should be acting in good faith providing his or her clients an accurate estimate of the fees their clients will need to bring in to close and they should listen to their clients specific needs such as money limitations and payment limitations and design several cost estimates to fit those needs. Ultimately it is up to the client to pick the payment and cost scenario that will fit their needs.
So what is changing in October? Well in the 120 pages of disclosures we send, there is a form called the Truth in lending statement (TIL) that states finance charges and APR to the client on every deal. We are also sending them a “Good Faith Estimate” (GFE) of costs. Those two forms are going to be merged into one form, although it is still a 4 page form I think the information to the client is presented better and is more accurate than the old TIL and GFE. This new form will be called the Loan Estimate and will be a combination other GFE and the TIL. That is only the first part of the changes in October, however. The next part of the change will be to closing part of the transaction. The new rules will require that a borrower receive his or her closing statement to review 3 business days prior to closing or in California’s case signing the legal papers (i.e. Loan Documents). What this means is, that once the loan has been approved and all the conditions the underwriter has asked for are in, the client will be given an estimate of the final closing costs that they will have to review for a mandatory 3 business days before they can sign the final legal documents. Three business days are defined as Monday thru Saturday except holidays and starting from midnight the day the client “receives” and acknowledges the disclosure. So if the client receives the disclosure on Monday the time will start midnight Tuesday morning, so the first day a client can sign the final paperwork would be Friday. Now if during the review process something changes, or they negotiate something different with the Realtors or the seller during the 3 days, the transaction may not only have to be re-unwritten but those three days will start all over again. For example; the client is given the fee estimate and the Realtor sees that the client is being charged for a home warranty so the Realtor says they will pay for that item for the client. You guessed it, it has to go back to the lender and be re-disclosed and the 3 days start all over again. If the borrower never acknowledges the receipt of the fees estimate/HUD1 it will extend the waiting period to 8 business days. The intent of the new law is to allow a consumer sufficient time to review the costs prior to consummating the mortgage. Although this is not a bad idea, in theory, it really can slow an already stressed transaction into a highly stressed transaction. As I know from being in the industry for the last 30 plus years the most stressful part of the Real Estate Transaction is at the end where a client is getting their funds together to close, transferring or starting up their utilities, and coordinating their move. Then to add this time constraint at this point in the transaction could be disastrous for buyers and sellers that have to coordinate their move as well. An unintended circumstance that will come from this new law will be the fact that the lender will be held to the closing estimate that is produced prior to closing, so what used to be the Escrow Company’s responsibility of preparing an estimated HUD1 will now revert to the lender to produce. Lenders are not currently set up to do this function, so over the next few months they are going to have to put new procedures in place to produce this form, it could take a lender an extra day or so to produce the letter adding additional time. To see a timeline of how the process of a loan works, and will work, go to and go to our process flow page and this will detail all the steps to a transaction.