Coming this summer – A new real estate settlement experience

real estateFor many, August 1st will be like any other summer day. However for those in the lending and real estate industries, August 1st is when the Consumer Financial Protection Bureau’s (CFPB) new lending, closing disclosures and rules go into effect.

Know Before You Owe” is a project that began before the official opening of the CFPB (which officially opened July 21st 2011), and undertook the remaking of mortgage disclosures to make them more consumer friendly. You might say the project started with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which mandated the creation of the CFPB as well as amends the Real Estate Settlement Procedures Act (RESPA). Sec 1098 of Dodd-Frank states that the Bureau “shall publish a single, integrated disclosure for mortgage loan transactions” in a “readily understandable language” so as to help borrowers understand the financial aspects of their loan clearly and to be nontechnical.

A change in industry disclosure and compliance to enhance consumer protection is not new. RESPA and the Truth in Lending Act (TILA) were both devised as consumer protections, and amended over the years. RESPA was enacted in 1974 as a protection for consumers from abusive and predatory lending practices to help home buyers better shop for services related to the home buying process. Enacted in 1968, TILA provided guidelines for which lenders are required to inform consumers about the cost of their loan; which includes the disclosing the Annual Percentage Rate (APR), finance charges, amount financed, and the total amount paid as scheduled. The new integrated disclosure forms replace the Good Faith Estimate (GFE) and Settlement Statement (HUD1) required by RESPA and the Truth and Lending Disclosure Statement required by TILA with a Loan Estimate and a Closing Disclosure.

RESPA and TILA require disclosures to be provided to you within three days upon making your mortgage application, as well as not having changed prior to your closing of the transaction. Changes to these regulations and disclosures have often been made to keep up with the industry as well as to enhance consumer disclosure and education; the most recent revisions being made immediately after the financial crisis. Although redesigned to be more efficient and accurate, the most recent revision of the GFE and the Truth in Lending Disclosure Statement remained technical in nature. Many claimed the forms remained confusing making it difficult to compare mortgage costs between lenders; costs were not always labeled consistently and sometimes changed prior to closing.

By combining these disclosures into two forms in a clear and understandable language, the forms present important information conspicuously to help consumers decide if the mortgage is affordable and warn about loan features that they may want to avoid. The new forms seek to standardize fee and cost disclosures so as to make shopping easier; with standard cost and fee disclosures, comparisons will be more like comparing two apples rather than an apple to an orange.

One of the more important aspects of the new rules is that the new Closing Disclosure be given to the borrower three days prior to settlement. During the three days prior to closing, changes to the Closing Disclosure that increase charges are prohibited (unless allowed by exception). You can find more information about the CFPB and view the new disclosures at the CFPB website Know Before You Owe (consumerfinance.gov/knowbeforeyouowe).

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

RESPA empowers home buyers and consumers

Housing

Although the Real Estate Settlement Procedures Act (RESPA) is one of those laws that you don’t hear much about, it’s a consumer protection statue that has been around for while.  Enacted in 1974, RESPA was intended to help home buyers be better shoppers by requiring the disclosures regarding the nature and costs related to the real estate settlement process.  Keeping RESPA relevant, there have been modifications and clarifications through the years, most notably the change of administration and enforcement in 2011 from HUD to the Consumer Finance Protection Bureau (CFPB).

RESPA is generally known for empowering consumers in the real estate process by allowing consumers (in most cases) to choose service providers, and prohibiting kickbacks (e.g., unearned fees) for referrals.  Section 8 of RESPA prohibits real estate service providers from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage. While Section 9 prohibits a home seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.

RESPA also requires the disclosure of affiliated business arrangements associated with a real estate closing.  An affiliated business relationship is considered to exist when there is a direct or indirect referral from a service provider to another provider of settlement services when there is an affiliate relationship or when there is a direct or beneficial ownership interest of more than one percent.  The disclosure of such a relationship must specify the following: the nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate form at the time of the referral (or at the time of loan application or with the Good Faith Estimate if referred from a mortgage lender).  In most cases, you’re not required to use the referred affiliated businesses.

RESPA violations are serious, and penalties can be severe.  For example, HUD (hud.gov) lists the penalties for violations of Section 8 “… anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.

The real estate industry takes RESPA very seriously; the industry educates service providers about empowering consumers, as well as regulation compliance.  And although modifications of RESPA are to keep up with the real estate industry; some still claim that there are sections of RESPA that remain vague, as demonstrated by the Supreme Court opinion of Freeman v. Quicken Loans, and further clarifications (such as the RESPA Home Warranty Clarification Act of 2011).

In the past, RESPA violations were pursued vigorously by HUD; resulting in settlements as well as criminal investigations.  Today, the CFPB (consumerfinance.gov) has taken over the reins, and continues the pursuit of RESPA violations with the same if not increased vigor.  More information and guidance about RESPA can be obtained from the CFBP (consumerfinance.gov).

by Dan Krell
© 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Will new mortgage rules set stage for subprime resurgance

Subprime Mortgage

After much speculation, new mortgage and appraisal rules have recently been revealed and will go into effect in January.  Combined with the recent news of FHA’s reduction of loan limits (authorized increased limits sunset the end of 2013), there’s been a lot of buzz about how the housing market and home buyers could be affected.

On December 18th, the Consumer Financial Protection Bureau (CFPB) launched a campaign to educate consumers about new mortgage rules that go into effect January 10th; specific information and fact sheets can be found at consumerfinance.gov.  Among the new rules, several include: the creation of the Qualified Mortgage (QM); new mortgage servicing rules; and additional protections financially challenged borrowers.

The QM is classified by the CFPB as a loan which qualified borrowers are presumed to be able to repay; and is described as a “safer” loan compared to some of loans originated prior to the mortgage crisis.  One of the main features of a QM, as of January 10th, is that mortgage lenders will have to assess the borrower’s ability to repay.  Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.  Although lenders must make an effort to determine a consumer’s ability to repay based on typical factors including: income, assets, and debts; the new rules do not eliminate all subprime mortgages.

Two additional features of a QM include safer terms and limiting points and fees.  A QM cannot have loan terms that have been attributed to “risky” loans, such as negative amortization or interest only payments.  Furthermore, if you are directly paying a mortgage broker to originate your loan, they can no longer receive additional payment by another party for the same transaction; a QM is limited to 3% of the loan amount for points and fees.

To assist borrowers, the CFPB has set new mortgage servicing rules that include: providing clear mortgage statements that show how payments are credited; addressing mistakes promptly; crediting payments when received; and providing early notice for adjustable interest rate increase.

To assist borrowers facing financial challenges, the CFPB institutes rules that include: foreclosure cannot be initiated prior to 120 days delinquent; a foreclosure cannot be initiated if a complete application for mortgage assistance has been submitted; servicer call centers must be able to answer borrower questions relating to critical documents; as well as providing accurate and timely foreclosure status to borrowers who ask.

Financially challenged borrowers seeking assistance through their mortgage servicer have additional protections.  Borrowers who make application for loss mitigation early on must have all their options evaluated with one application; an explanation must be provided to borrowers rejected for loss mitigation; and borrowers could appeal a loan modification rejection based on the servicer’s mistakes.

New appraisal rules instituted by the CFPB become effective January 18th.  Although these rules do not apply to all mortgages, typically a borrower should expect: a licensed appraiser; an interior of the property, and a copy of the appraisal prior to closing.  Additionally, a second appraisal is required for a home that is considered a “flip;” a home sale that has sold in the previous six months is classified as a flip.

Although some have speculated the new rules, along with reduced FHA loan limits, will limit the availability of mortgages for some home buyers; others see the resurgence of the subprime mortgage to fill the gap.

New mortgage rules, lowered FHA loan limits, and other new changes are increasing investor backing of non-conforming mortgages.

by Dan Krell
© 2013

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Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  Using this article without permission is a violation of copyright laws.