07/14/09: Housing Counsel New Disclosures Rules May Delay Your Settlement
By: Benny L. Kass
New disclosure rules for mortgage financing will go into effect on July 30, 2009, for all new loan applications. They may delay your settlement. In fact, some of the major mortgage lenders have begun to alert their potential borrowers that the new rules will cause brief delays in closing. PNC Mortgage, for example, is suggesting that consumers “set realistic expectations upfront and throughout the transaction with the listing agent, the seller and the homebuyer in regards to potential closing dates.” PNC and other lenders are cautioning that “it is wise to plan for at least a 30-day close.”
The Truth in Lending Act (TILA) originally became law back in l968. Its stated purpose was to promote the informed use of consumer credit by requiring disclosures about its terms and costs. Unfortunately, over the years, these disclosures have become meaningless – and confusing. Consumers who, for example, obtained a mortgage loan with an interest rate of 6 percent learned – often only at settlement when they received the disclosures – that the Annual Percentage Rate (APR) was 6.25 percent.
Why the difference? Because to calculate APR, a lender has to include more than just the actual interest rate. If the lender charges points, or collects fees at settlement, this impacts the calculation. If you are borrowing $300,000, but the lender charges you $750 in fees, you really are only borrowing $299,250; thus the APR – the yield to the lender – is higher.
More significantly, the TIL statement is often only provided to the borrower on the date of settlement. Clearly, this defeats the purpose of disclosure. How can you shop and compare mortgage loans if you are at the settlement table. If you don’t like the APR, you may be in default of your contract should you decide to look for another loan and don’t close on that date.
The new rules are quite simple, and apply equally to principal residences and second homes:
– your lender must provide you with early disclosures (i.e. the Truth in Lending and Good Faith Estimate) within three business days after you make a loan application;
– if you make application for a loan over the phone (or via the internet), you can only be required to pay a credit report fee. Other fees can only be collected after the signed disclosure documents have been received back by the lender. If you apply in person, the lender can collect other fees, but again only after you have received – and signed - the disclosures.
– you cannot be required to close on the loan (i.e. go to settlement) for seven business days following your receipt of the required disclosures;
– if, for any reason, the APR increases by more than .125 (1/8th) percent from the original disclosure, your lender must provide you with a revised TIL statement and must wait three additional business days before you can close on the loan;
There has been a lot of confusion as to what is a “business day”. Some lenders treat Saturday as such a day, while others do not. The Fed has clarified this to mean “all calender days except Sundays and specified Federal legal public holidays.” According to the Fed’s summary of the new law, “using the more precise definition ...will mean that the standard for determining when a waiting period ends is the same for all creditors. Moreover, whether a creditor’s offices are open or closed does not affect the time that a consumer has to receive and review disclosures.”
While this definition clarifies and standardizes the law, it does not change the situation where consumers who refinance briefly end up paying on their old loan as well as their new one. Example: your current mortgage is 7 percent, and you settle on the refinance loan on July 27, 2009. Because this is a refinance with a new lender, there is a three day “cooling-off” period. Your new lender funds the loan on July 31st, and the settlement attorney uses those proceeds to pay off the old loan. However, because there is a weekend involved, the old loan is not paid off until Monday, August 3rd. Although you do not start paying interest on the new loan until the day it is funded, you still will have to pay daily interest on the old loan until it is paid off. This is an unfortunately fact of life, but you can shorten these extra days by scheduling your refinance closing toward the end of the week.
Can you waive the various waiting periods? Yes, but it must be for a bona fide emergency. You must provide a dated, written statement to the lender explaining the emergency, and the lender is prohibited from using a pre-printed waiver form. But the Fed cautions that “waivers should not be used routinely for reasons of convenience.”
The Federal Reserve Board has promised that it “anticipates proposing new model disclosure forms and clauses before the end of this year, in connection with consumer testing and the comprehensive review of closed-end mortgage disclosures that currently is underway.”
In the meantime, consumers must understand that disclosures are meaningful only if they are reviewed and acted upon. When you make a loan application and ultimately go to settlement, you will receive a large number of papers. Read them all carefully, ask questions, and always shop and compare before making a commitment for what may be the largest investment of your life.
– Boilerplate --