New Housing Rules Will Delay Closings
New home closing rules due to go into effect this week might lead to a slowdown in the homebuying process, at least over the near term, as lenders and realtors brace for a complex new system.
The TILA-RESPA Integrated Disclosures (TRID) system, overseen by the Consumer Financial Protection Bureau (CFPB), is due to be implemented on Saturday.
The program is designed to simplify the home closing process by consolidating rules and disclosures in the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).
But while it might make things easier for homebuyers, TRID will likely complicate things for mortgage lenders as well as realtors, both of whom have been scrambling to learn new rules and adapt to a new system that covers everything from how closing fees can be imposed to when closing documents must be finalized.
"What's hard to predict is how all the extraordinary business process changes will go," said Pete Mills, senior vice president for Residential Policy at the Mortgage Bankers Association. "The big challenge from an implementation standpoint is around system integration issues. That's where a lot of concern is in terms of what happens Oct. 3.
Meanwhile, there are also worries — a la the Y2K panic of 16 years ago — that everything will come to a screeching halt as soon as the TRID system goes live.
"There's a lot of trepidation about Oct. 3 and whether the system will work when they flip the switch," Mills told IBD.
Easier For Homebuyers
Although the transition to the new TRID system involves a complex web of moving parts, the actual changes for homebuyers are pretty simple. Instead of several disclosures under the old system, TRID will feature two primary disclosures: the Loan Estimate and the Closing Disclosure.
According to the website of U.S. Bank, the Loan Estimate replaces the initial Truth-in-Lending disclosure and Good Faith Estimate for most closed-end mortgage loans. The Closing Disclosure replaces the final Truth-in-Lending disclosure & HUD-1 Settlement Statement for most closed-end mortgage loans.
The goal is to make it easier for borrowers to understand closing documents and make more informed decisions. Even industries likely to be heavily impacted by TRID, such as the mortgage banking industry, see favorable aspects to the program.
"The industry thinks this is a positive from a closing standpoint," Mills said. "The actual forms are easier to read and more explanatory to the consumer. What the borrower sees is better under the new system than the old one. It also improves the ability for the consumer to shop.
But the new system isn't so simple for professionals.
"You are not just changing the disclosures — you are changing the way all the parties to the transaction interact: the closing agent, the realtors, the attorneys," Mills said.
Most of these professionals have undergone months and even years of training preparing for TRID. Even with that training, however, industry groups are taking a cautious approach to the new system.
The National Association of Realtors, for example, is preparing for delays in the closing process. In comments e-mailed to IBD, NAR President Chris Polychron said the CFPB's rule "marks a major event that will cause some bumps in the road," but that real estate professionals "can mitigate those challenges by staying informed and keeping the lines of communication open.
TRID Delay Ripple Effect
"In the early going, consumers might expect to see the mortgage process lengthened, and to address potential delays many realtors report that they are planning to put a longer time horizon on their purchase agreements," Polychron added.
With many people selling their old home as they buy a new one, TRID delays in some closings may trigger hold-ups in other contracts.
Alvaro Lacayo, housing analyst for Gabelli & Co., said that while homebuilders are "obviously aware" of the upcoming changes, most are unsure of how the new system will impact their business.
"There are too many unknowns — builders are not really sure what kind of impact there will be on demand," Lacayo told IBD. "You can expect some friction in the short-term, which could delay closings and could have an impact on delivery schedules for several builders. Mid-term or long-term it's harder to see what the impact will be.
Three Days Before Closing
One of the changes involves when buyers get disclosures. For example, closing disclosures are now required to be delivered three days before closing, Mills says.
For mortgage lenders, the hope is that the CFPB will be flexible on this and other new rules in case things go wrong.
"Say the buyer and seller need to close on Nov. 10, but some last-minute hiccup in the inspection sets things back," Mills said. "The rules technically require you to re-disclose and start the three-day process over again. We'd like to see some flexibility on this so that those involved can get more time without having to start the process over.
CFPB officials did not respond to requests for comment. However, the agency's website does address concerns about the new rules, saying that only three changes require a new three-day review: when the annual percentage rate increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans; when a prepayment penalty is added; or when the basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.
"There has been much misinformation and mistaken commentary around this point," the CFPB website said. "Any other changes in the days leading up to closing do not require a new 3-day review, although the lender will still have to provide an updated disclosure.
Although there are concerns that the new system is being implemented too soon, the Oct. 3 date for taking TRID live is actually an extension of an earlier Aug. 1 deadline. The CFPB issued the final rules nearly two years ago, and the ultimate origin stems from the 2010 Dodd-Frank law.
The new date has a couple of advantages, watchers say. For one thing, it falls on a Saturday, when little business is conducted. This means "the real 'go live' date is Monday, when the work week begins," Mills said.
Slower Homebuying Season
Also, pushing the date back to October means the new system goes into effect during a slow period for homebuying. Even if there are problems, they at least won't have as big an impact as they would during the height of the summer selling season.
This is hardly the first time an industry has felt a twinge of panic leading up to a new way of doing business. Mills sounds confident that real estate professionals will eventually master the new system.
"Over time we'll get better at it, get clearer answers from the CFPB, and improve the systems," he said.
But in the meantime
"There's a real concern over the transition period of the next three or four months or so," Mills said. "Most realtors and lenders are being encouraged to take a little more time. I've heard that in some cases realtors are building in an extra 15 days or so. They don't want to lose a deal because of disclosure problems."
