Effective Oct. 3, regulations aim to protect consumers, but they prompt concerns in industry
The changes, prompted by the 2010 Dodd-Frank financial law, are meant to help consumers better understand the terms of their mortgages before they sign the dotted line.
But some in the real-estate industry worry that the rest of the year could be marked by delayed closings, frustrated borrowers and confused real-estate professionals as they adjust to the new rules.
At heart, the changes simplify forms long required by the federal government that disclose loan terms, such as a mortgage’s interest rate and prepayment penalties. The rules also require that consumers see the final terms at least three business days before closing, a change meant to ensure they have time to understand what they’re agreeing to.
The reform is meant to prevent what occurred during the housing boom, when some borrowers agreed to loan terms they later found they didn’t understand, such as low initial interest rates known as teasers, loan balances that could increase over time and balloon payments due after a certain number of years.
Few lenders now make loans with the most exotic loan terms, but the Consumer Financial Protection Bureau, which is enforcing the changes, says the new forms will ensure borrowers have a chance to understand what they’re getting into before they sign.
Lenders have spent billions of dollars in technology-system changes and training to get ready for the changeover, said David Stevens, president of the Mortgage Bankers Association, a lender trade group.
“It is without question the single largest implementation challenge that the broad industry has faced since Dodd-Frank,” said Mr. Stevens. “It’s massive. It involves every real-estate agent, settlement-service provider, every consumer, mortgage originator, everyone.”
Quicken Loans Inc., the third-largest U.S. mortgage lender by volume according to Inside Mortgage Finance, has had about 350 employees working for 17 months to change over to the new federally mandated processes and forms, said Chief Executive Bill Emerson.
“Clearly if we weren’t doing that, we’d have folks deployed on other projects, maybe things that would be innovative. But there’s no choice. You have to do it,” said Mr. Emerson, who said Quicken is prepared for the change.
Despite having a long time to prepare, some in the real-estate industry are worried that technology snafus could crop up in the days after implementation. The National Association of Realtors is advising real-estate agents to extend contracts by around 15 days in anticipation of delays in some home closings.
Some changes to the closing terms—such as if a home buyer wanted to change from a fixed-rate mortgage to one with an adjustable rate—cause the three-day period to reset.
Since home transactions often are made together, as home buyers sell their old homes, a delay in one home closing can cause a ripple effect.
The National Association of Realtors has hosted dozens of webinars, conference calls and training sessions with real-estate agents to get them ready for the changes, said NAR President Chris Polychron. “Are there going to be some blips? Yeah. Are there going to be some delays? Absolutely,” Mr. Polychron said.
Bert Bevis, a real-estate agent in Tallahassee, Fla., said he has taken a few classes to prepare for the changes but is still worried some agents or vendors he works with might not be prepared. He said borrowers, accustomed to being able to make last-minute changes to a transaction, might get frustrated at closing delays.
“If they dillydally, they’re going to get their closing delayed. That’s the missing link. Nobody’s educating the consumer yet,” Mr. Bevis said.
Mortgage companies have known for years the change is coming. The CFPB began designing the new rules and forms in February 2011, months after the Dodd-Frank reform was passed, and issued the final rules nearly two years ago. It intended to implement the rules on Aug. 1, but some lenders and others in the real-estate industry thought they weren’t ready and were worried that the changes could disrupt transactions during the summer home selling season. A bipartisan group of congressmen also urged the CFPB to postpone the date, and the CFPB delayed the implementation date to October.
Now, the CFPB says it will use discretion in not bringing penalties against lenders as long as it believes the lender is making a good-faith effort to comply with the new rules.
Kevin Leibowitz, president of mortgage broker Grayton Mortgage Inc. in New York, said he is still planning to keep his 30-day timeline for getting mortgages closed, but mentally is going to build in an extra week to deal with expected snafus.
“If I’m planning to get a loan closed by Nov. 5, I’m going to pretend closing day is Oct. 28,” Mr. Leibowitz said. “I’m not expecting problems, but you don’t know what you don’t know.”