Lenders, brokers prepare for major changes to rules
What does it mean for consumers?
Under new disclosure regulations, buyers and sellers in real estate transactions that involve a loan after Aug. 1 can expect the following:
45 or 60 days to close a deal
Getting pieces like title work, appraisals, credit reports and surveys done well ahead of time from the closing day.
Contracts that include an automatic extension of the deal if delays come up in the mortgage process.
No last-day changes or cost increases — the consumer must receive a disclosure three business days prior to closing.
EAGLE COUNTY — Mortgage lender Chris Neuswanger remembers a recent deal where four transactions were completed on the same day — both the buyer and seller of a home were simultaneously either selling their old home or purchasing a new one. It all went down without a hitch, but it’s the kind of common situation that Neuswanger and other industry experts don’t expect to be seeing much of in the future.
New regulations implemented by the Consumer Financial Protection Bureau that go into effect Aug. 1 state that if there are any changes in the cost of a loan transaction, such as the title work, appraisal costs, credit report or survey, the consumer must receive a disclosure three business days prior to closing. The new rules are designed to protect borrowers from last-minute costs, but Neuswanger, a loan originator with Macrofinancial Group in Avon, thinks they have the potential to kill or delay real estate deals.
As he explains, the regulations (called the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure), combine two outdated forms into one easier-to-read document. While that’s a positive, he says that small changes in cost are very common throughout the course of a mortgage deal and they often happen toward the end of a transaction. With the new rules, any changes in the cost of a loan transaction, even small ones due to third party fees will require re-disclosure and a three-business day waiting period before the transaction can close.
Delays on the way?
Experts fear that the disclosure periods could have a snowball effect down the line.
“Under the current scheme of things, there are certain costs that as a group can increase — title work, appraisal, credit report, survey — and that bucket of costs can go up 10 percent without triggering a new disclosure,” said Neuswanger, adding that their estimates are usually pretty close to the real cost. “The new rules say that if any of those costs increase as much as a dollar, everything comes to a halt and the borrower must re-disclose that his title work cost a dollar more. That can be discovered the day before a closing, and everyone has to wait three days to reconsider.”
There are fears that the seller might take the opportunity to back out or that delays will throw off the all-important timing of real estate deals.
“The seller doesn’t have to honor the waiting period. He could declare the buyer in default and keep his earnest money,” said Neuswanger. “That could daisy chain down the line if the seller is trying to buy a place and trying to close on it the same day. Will he have to pay for an extension on his rate lock? Then there are more delays as the second disclosure period takes place.”
A new normal
Keller Williams Mountain Properties Realtor Joan Harned agreed that the new rules could interfere with timing, but she said that she has confidence that real estate professionals will all adjust in time. The time it takes to close a deal in the future may be 45 or 60 days instead of 30.
“We will adjust and will have to plan in more time into our contracts,” she said. “The problem is that it may come at the end when you’re planning to move in or out, and you’ve got the moving vans planned. We’re just going to have to warn people and be more careful about getting things done ahead of time and not pushing any dates to the end.”
Neuswanger said he thinks that mortgage professionals will start overestimating costs in order to avoid disclosure periods, and that brokers may start writing clauses into contracts that address disclosure periods.
Stewart Title escrow officer Cindy Denney said she thinks the end result will be better for consumers.
“Right now we’re allowed to operate on the final night or day of closing,” she said. “Imagine how stressful that is for someone, that something might change on the last day. That’s really what this is directed at, to provide more information and earlier to the consumer and stop last minute changes.”
Harned said buyers and sellers may have to be patient if they’re selling under the new rules, but that regulation changes are just part of the business.
“Those of us who have been in this a long time have been through a lot of changes, so there’s no reason we cant prepare for it. We’ll get good at it, and we won’t even remember how it was before,” she said.
Assistant Managing Editor Melanie Wong can be reached at 970-748-2927 or at firstname.lastname@example.org. Follow her on Twitter @mwongvail.