Effective October 3, 2015, the Consumer Financial Protection Bureau (CFPB) has made the process of getting a mortgage on your new custom home easier to understand by instituting the new Know Before You Owe mortgage disclosure rule, part of a new Bureau-wide initiative by the same name. The required disclosure forms have been reduced from four forms to two and have been redesigned to make it simpler for you to understand, shop around for and compare offers. The CFPB now requires lenders to give the buyer more time to review the terms of their mortgage before accepting them. This means the buyer has more time to ask their lender questions and/or seek advice from a lawyer.
What has changed?
Most mortgage applications submitted as of October 3, 2015, require only two new simplified disclosures, the Loan Estimate and the Closing Disclosure. The buyer will have three business days to review the Closing Disclosure before closing on the property. The Bureau is working to make sure that the costs and risks of financial products are crystal clear to the consumer.
What’s the new rule?
The Know Before You Owe rule was mandated by the Dodd-Frank Act and combines the required federal disclosures for most mortgages. It requires lenders to give the borrower their Closing Disclosure three days before closing. These three days give the buyer time to understand the terms of their loan, compare it to their Loan Estimate, and ask their lender or advisor any questions they may have.
What are the disclosures?
The disclosures are the standard forms that the buyer gets when s/he works with a lender to obtain a mortgage. The disclosures help the buyer understand the terms of the mortgage before accepting them. Any buyer who applied for a mortgage before October 3, 2015, would have been given a Good Faith Estimate and an initial Truth in Lending disclosure. As of October 3, the buyer will now get a Loan Estimate within three business days of submitting a mortgage application. In addition to the Loan Estimate, the buyer will also receive a Closing Disclosure three business days before closing. The Closing Disclosure is a summary of the final terms of the loan. This form replaces the HUD-1 Settlement Statement and final Truth-in-Lending forms for most mortgages.
Why were the forms changed?
For the past 30 years, lenders have been required by federal law to provide two different disclosure forms to consumers applying for a mortgage and two different disclosure forms to consumers before they close on a mortgage. These four forms were developed by two different agencies and they had quite a bit of overlapping information. The two new forms, the Loan Estimate and the Closing Disclosure, combine information and mirror each other so that the buyer can easily compare the terms they were given on the Loan Estimate with the terms on the Closing Disclosure. The new forms make it easier for consumers to find the crucial information they need regarding their mortgage terms.
Does this new rule delay the closing date?
The answer is no for most situations. The new rule gives the buyer three business days to review the Closing Disclosure and check it against the Loan Estimate to make sure that the deal represented in the estimate is the deal the buyer is getting. In the past, consumers have felt that there wasn’t enough time to review the documents, so the new rule allows time to ensure that the buyer feels comfortable before committing to a mortgage.
Here are some useful videos that Chicago Title has created to explain the new process.