The Consumer Financial Protection Bureau (CFPB) requires use of new estimates and disclosures for consumer mortgage loans applied for on or after October 3, 2015.
Prior to the new disclosure requirements, detractors were concerned new closing rules included with the forms were going to lengthen the closing process, extending the length of time to buy a home. Now, with November 2015’s mortgage data available, it appears the time to close has in fact increased. Were the critics right?
Three-day delay lengthens closing — rarely
Know Before You Owe tasked the CFPB with replacing the lengthy, confusing disclosures with new consumer-friendly forms. Now, two disclosure forms are required instead of the previous four:
- The Loan Estimate replaces the Good Faith Estimate (GFE) and the initial Truth-in-Lending Statement [See RPI Form 204-5 and 221]; and
- The Closing Disclosure replaces the Settlement Statement (HUD-1) and the final Truth-in-Lending Statement. [See RPI Form 402]
One doesn’t expect fewer and simpler forms to result in a longer closing process. However, along with these form changes, the transactions are required to be placed on hold for three days following a significant change made to the closing disclosure. Critics believe the closing process will be put on hold each time a comma is moved or a name misspelled.
In truth, the three-day hold is only required if one of three significant changes are made to the closing disclosure:
- the annual percentage rate (APR) on a fixed rate mortgage (FRM) increases by more than 1/8 of a percent, or 1/4 of a percent for adjustable rate mortgages (ARMs);
- a prepayment penalty is added when it previously wasn’t part of the mortgage, which would make it costly for the owner to refinance or sell in the future; or
- the mortgage product changes, for example from an FRM to an ARM, according to the CFPB.
Closing is only delayed in these three relatively rare circumstances. Therefore, first tuesday forecasted no noticeable closing delays would occur following the roll-out of Know Before You Owe.
Why the delay?
However, the average time to close increased to 49 days in November 2015, up from an average 46 days in the previous month, according to Ellie Mae. That’s an additional three days to close — exactly what the critics feared. Further, the number of homes sold in November were well below the previous month, even considering the seasonal sales volume decrease which tends to occur in the fall.
PropertyRadar attributes the slowdown to the new disclosure requirements, and they’re likely right. But it’s not due to the three-day rule. More likely, lenders just used the extra time to become familiar with the new disclosures, and it took an average of three additional days per closing to work out the changes.
Unless ARM use or APR rates jumped in November (which they didn’t) or prepayment penalties are making a comeback, the three-day hold period isn’t to blame. Therefore, the closing delays are unlikely to continue in the months to come as lenders adjust to the new forms.
All things considered, the new disclosures are beneficial to buyer-occupants, who are less savvy about industry-specific terms. The new forms translate the mortgage for laypeople, helping them understand the payment terms and procedures. Further, the three-day waiting period, while rarely obligatory, will be extremely helpful for those situations in which it is required, when the mortgage payment changes significantly from what the homebuyer was initially led to anticipate. Therefore, when closing is delayed due to the three-day rule, it will be in the homebuyer’s or homeowner’s best interest.
Agents and brokers: What has been your experience in the months following the new disclosure requirements? Have you experienced delays, and how have clients responded to the new disclosures? Share your experience in the comments!