The Consumer Financial Protection Bureau’s (CFPB’s) “Know before you owe” integrated financial disclosure is a large improvement over the old, confusing mortgage disclosure forms. Effective October 2015, homebuyers and sellers will each sign a single, streamlined form at closing: the unified Closing Disclosure. This is to be delivered to the homebuyer and seller three business days before closing.
However, there’s a further change under the “Know before you owe” rules that is drawing heavy fire from critics. When a substantial change is made to the disclosure, the transaction is placed on hold for an additional three days. During this time, the buyer or seller reviews the changes and the deal is suspended in stasis.
A recent piece in Forbes loudly disapproves of the three-day required wait period when changes are made to the Closing Disclosure. The author suggests the CFPB’s new rule has the potential to delay closings for everyone directly and indirectly involved in the transaction:
“The mortgage world is virtual and speedy and the hiccup will in all likelihood be quickly and satisfactorily remedied. But if the numbers change, the CFPB says everybody has to stand down for 3 days because, well because the CFPB says so. So now what? Families stay with family, motel rooms are secured, storage fees are paid, unhappiness abounds.
And then there is the domino effect. A buyer delayed closing may delay the closing for the house the seller is buying. That could mean the closing could be delayed for the house the seller of the house the first seller is buying which could mean the closing may be delayed for all of the rest of the closings down the falling dominos line. Anarchy.”
Well, when you put it that way, it does sound inefficient and useless, doesn’t it? But let’s take a moment to dig a little deeper to see whether there is any merit to the criticism.
The truth is, the new disclosure rules will not delay closings for the vast majority of transactions.
The initial three-day waiting period is standard for all consumer mortgages and thus can be planned for. Further, an additional three days are not required for each and every change made to the mortgage, as is glossed over in the Forbes piece. Rather, the three-day clock only starts over if:
- 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.
These three (fairly rare) instances are the only things which cause a three-day closing delay.
More common adjustments to the mortgage which will not require an additional three-day review include changes to:
- the real estate fee earned;
- required escrow amounts;
- typos in the closing table; and
- unexpected discoveries, even if they require seller credits.
In all of these common changes, buyers won’t need an additional three days to think over their purchase decision or review closing documents. However, when substantial changes are made — such as the inclusion of a prepayment penalty — buyers need the extra time to think over the significant financial implications.
The CFPB’s responsibility is in its name: to protect consumers. Therefore, when a mortgage is altered substantially, it’s in the consumer’s best interest to have extra time to review the changes with their agent, crunch the numbers and figure out how these changes will affect their future finances. Without the requirement, homebuyers and sellers may be inclined to agree with the lender’s last-minute change just to ensure a timely closing, without fully realizing what they’re agreeing to. Worse, they may feel like they have no choice and are beholden only to the calendar.
Therefore: bring on the additional three-day wait period. In most cases, it won’t negatively push back your closing dates. But when it does delay closing, you can be sure it will be due to a significant change in terms and in your client’s best interests to give it careful, deliberate thought.