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New Mortgage Disclosure rules



July 29, 2009 – Comments (4)

I posted this reply in d1david's thread, but I think it important to repeat since I think it include's important enough information for people who will be buying or selling a home.  Effective July 30, 2009 new rules will take effect which can certainly impact closings.

Here's the "plain english"  short version:

"1. Requires a seven business day waiting period prior to closing a home loan (business days are everyday except Sundays and Holidays). This means that before a borrower can close on a transaction the borrower must receive the final Good Faith Estimate (GFE) and lending statement disclosing the final Annual Percentage Rate (APR) seven days prior to closing.

2. If the final annual percentage rate APR is off by more than .125% from the initial GFE disclosure then the lender must re-disclose and wait yet another three business days before closing on the transaction.

3. The consumer has the right to cancel and not proceed with the transaction if they so choose.

4. Lenders are forbidden from collecting money for appraisals, loan applications, etc. at the time of the loan application until after 3 business days from the initial Good Faith Estimate disclosure. Lenders can only collect from the borrower the credit report fee at the time of application. No other fees are permitted to be collected at the time of application. The borrower will have to go see the lender again or send in the appraisal money after the first three business days have passed."

These changes will just make things more miserable for people and focuses on the wrong things. 

First, it has little impact on re-finances since people have a right to cancel any refinance up to 3 business days after the closing anyway.

Second, it really will screw people up to ever change what is known as "The TIL" (or truth in lending form).  An error in calculation of the TIL is noticed at the closing, but no one really cares. Tough, need to adjourn the closing and wait 3 business days to re-schedule.  Now that will screw anyone who is selling their home in the morning and buying in the afternoon.

I generally call "the truth in lending" form as "confusion in lending."  In theory it has value, in practice it confuses.  The TIL basically informs you of what the APR is.  APR does have a value, it is the net interest rate you pay after factoring closing costs on the loan.  It also discloses the total amount you will pay over the life of the loan, but that number just makes people cry. 

Anyone ever watch that "get cash quick" commercial by Gary Coleman (of the 70s TV show -they do show reruns so shush-  where he is famous for the line "what'ch you talking about")?  Well the commercial said borrow $5,000 quick and easy, yet if you saw the fine print as it scrolled quickly on the TV, it mentioned an APR of 99.94, which basically meant that to borrow that 5,000, your costs, were basically 5,000.

The TIL is also designed to help you compare loans.  One loan can be for 5% and another for 5.5%.  Natural instinct would be to go with the 5%.  But that 5% loan may involve a heck of a lot more closing costs wherein the ultimate APR could be say 6% yet the other only 5.75%.

Now I am all for getting accurate numbers as soon as possible, but this "adjournment" penalty is only going to screw people.

What I do find interesting is point #3 above.  I am willing to predict that all contracts will now have a clause adding language that says should a borrower elect to cancel and not proceed on the loan as a result of a TIL calculation variance, then the contract will be viewed as breached and any downpayment forfeited.  A seller will absolutely have to protect themselves against that.  You've sold your home. Your purchase of a new home is same day or even week.  Your buyer elects to cancel his mortgage because of an error in the TIL calculation.  You can't close on your buy as a result.  You are held in breach and you lose your downpayment there.  Well, as a seller you better protect yourself by adding a crystal clear contract clause, and tell your lawyer to do so.

This new rule doesn't really address the 2 most critical documents, imo; the 2 most important documents which had THE greatest impact on the Real Estate bubble, namely the loan application and the appraisal.  It was the games played with those 2 documents that did the damage.  But I guess Congress has to show that they are "taking action."

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4 Comments – Post Your Own

#1) On July 29, 2009 at 12:38 AM, MGDG (32.97) wrote:

Interesting. It does seem to muck up an already confusing area of closing on a Home Loan. In my experience I have had only one lender make significant changes to a loan document at closing. In that case I refused to sign until they reversed the changes.

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#2) On July 29, 2009 at 1:06 AM, awallejr (35.47) wrote:

One of the biggest swings can be what is called "short term interest."  Basically when you make a mortgage payment it goes backwards not forwards.  So if your loan is due September 1st, it covers the month of August.  The only exception is the first month of closing.  Banks want to get you on a 1st of the month to 1st of the month repayment, but no one ever knows before hand what day of the month you will close.  So the banks will charge you whatever remaining days are in the first month Upfront.  It is the only time they ever do that.

Now there can be a big swing on that closing cost depending if you close on the 1st day of a month or the last. The Good faith estimate really will have to assume the higher payment, but reality may wind up being the lower since ultimate closing dates are a result of many factors (such as schedule availability of the parties and their respective attorneys).

Another not unusual event might be if you didn't lock in that interest rate.  I've seen that enough times where a client is told one thing by the mortgage lender the night before a closing, then come closing the rate is 1/8 or higher.  Client then has to decide whether to close or not.  Under old rules, if they decided not to they could wind up forfeiting their downpayment.  It will be unclear under the new rules, since technically they may have a "legal" right to cancel.  A seller better provide new contract language to protect themselves.

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#3) On July 29, 2009 at 9:13 AM, d1david (28.54) wrote:

They need to take the odd days interest amount out of the equation for this new rule.  It is near impossible to determine an accurate closing date- whether it is refinancing or purchasing.


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#4) On November 26, 2010 at 2:41 AM, angelcrock (< 20) wrote:

They need to take the odd days interest amount out of the equation for this new rule.  It is near impossible to determine an accurate closing date- whether it is refinancing or purchasing.

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