Posts Tagged ‘truth in lending’

Coming Soon: Closing Disclosure

September 16, 2015

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Along with the new Loan Estimate, the current settlement statement (known as the HUD-1) will be replaced too. The new Closing Disclosure expands to 5 pages (currently 4 when including the signature page), but it too replaces some of the current documents we use today. Use this link for a preview of the new Closing Disclosure.

The Closing Disclosure includes the following information:

  • Page 1: recaps the first page of the Loan Estimate, which includes the loan amount, interest rate, other loan terms, closing costs (traditional closing costs and prepaids combined), and the cash to close.
  • Page 2 and 3: these look an awful lot like the current HUD-1 except in reverse order. The current HUD-1 shows the lump sum summary on page 1, and the itemization of fees on page 2. The Closing Disclosure references the itemization on page 2, and the lump sum summary on page 3.
  • Page 4: this page contains more details about the terms of the loan including whether or not the loan is assumable, if there is a demand feature, an escrow account, terms of making a late payment, partial payment, and whether or not the loan has a negative amortization feature.
  • Page 5: this page will replace the current truth in lending disclosure. The truth in lending itemization page should be eliminated with the itemization break down on page 2. The signature line is also on page 5.

While the Closing Disclosure expands from 4 to 5 pages, it should eliminate the current truth in lending form, the signature page, and maybe the truth in lending itemization page. For all practical purposes, we are really reducing the pages from 6 to 5. Less paper is always a great thing!

The biggest change of all will be when the Closing Disclosure is given to the borrower. The CFPB requires the Closing Disclosure to be sent three days prior to closing. If changes are made after the Closing Disclosure is sent out to the borrower, the three days could reset. This will definitely be the biggest challenge with the Closing Disclosure. That said, once everyone gets used to the process, we’ll be fine.

Got questions about the new Closing Disclosure? Contact me today to discuss. As always, if financing a home in Georgia, we can also talk about how I can help you with that loan!

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Coming Soon: Loan Estimate

September 8, 2015

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As discussed back in March, the new Loan Estimate disclosure is on its way! Originally, the new disclosure was scheduled to start August 1, but the CFPB move the implementation date to October 1. Use this link for a preview of the new Loan Estimate.

The Loan Estimate is a major step in the right direction compared to the current Good Faith Estimate (GFE). Why? While both documents are three pages, the current GFE is lacking key information. When I go through the GFE with clients, in addition to those three pages, I also must reference:

  • Page 2 of the loan application that shows the total monthly payment. The GFE only shows the loan and monthly PMI payment (if the loan requires PMI).
  • Page 4 of the loan application that shows the summary of the transaction. The GFE only shows the closing costs and prepaid totals. It doesn’t show the cash to close, any seller credits to closing costs, or any lender credits to the cash to close.
  • I also must have clients sign an intent to proceed with the loan disclosure because the GFE does not have a signature line on it

Some other great points about the Loan Estimate is that it will replace:

  • The Truth in Lending disclosure is now included in the Loan Estimate.
  • The Itemization of the Truth in Lending disclosures is also included in the Loan Estimate.
  • The Loan Estimate also has a section showing whether or not your lender plans to service the loan. Hopefully, this will eliminate the servicing disclosure as well.

When going through the numbers with a client, the Loan Estimate will reduce the number of pages I must reference from 10 to 3 pages. That should mean my loan packet will be reduced by those 7 pages. Anything to make the stack smaller!

Got questions about the new Loan Estimate? Contact me today to discuss. If you are financing a home in Georgia, we can also discuss how I can help you with the loan!

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2015 Closing Disclosure

April 1, 2015

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Along with a new Good Faith Estimate (see my recent post on the 2015 GFE), there is a new HUD-1 . The HUD-1 is more commonly known as the settlement statement, but will be referred to as the “Closing Disclosure” beginning in August of this year.

Just like the GFE, the Closing Disclosure is combining a couple of closing documents into one form. Even with the Closing Disclosure going from three to five pages, the total number of pages should stay roughly the same.

More on this in a moment. First, let’s talk about the one aspect of the new Closing Disclosure that will be very problematic. Beginning with these new disclosures, borrowers must be given a final Closing Disclosure at least three business days prior to closing.

This is not an April Fool’s joke, and the three day requirement will be the single toughest aspect for lenders, loan originators, closing attorneys, real estate agents, etc. to implement. Currently, if a closing is scheduled for Wednesday, and closing documents go out on Wednesday, we can close on Wednesday.

Not anymore. If closing documents go out late on Wednesday, a Closing Disclosure probably would not be approved until the following business day. Then the closing will have to be scheduled three business days after the final Closing Disclosure was approved. That means this example of a Wednesday closing just got moved into the following week.

The best way to approach this change is to add more days to the closing time frame until everyone (lenders, attorneys, agents, etc.) get accustomed to the three day requirement on the Closing Disclosure. Well, add time and be patient.

As for the components of the Closing Disclosure itself, they are pretty straight forward. Click the link to view the new Closing Disclosure.

The first page of the Closing Disclosure replaces the Truth in Lending document from closing. Pages 2 and 3 are essentially the first two pages of the current HUD-1. The fourth page provides a nice summary of the loan terms, explanations, and goes into more details about the escrow account. The fifth page is essentially the third page of the current HUD-1.

The Consumer Finance Protection Bureau attempted to simplify the loan details for consumers. For the most part, they succeeded with the implementation of the new GFE and Closing Disclosure later this year. Other than getting used to the new 3 day requirement for issuing the Final Closing Disclosure, these changes should make the loan details easier to understand for consumers.

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2015 Loan Estimate

March 26, 2015

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As mentioned in my previous post, there are changes coming this August to the way loan terms and details are disclosed to borrowers. This time, we’ll focus on the new Good Faith Estimate (also called GFE).

I am a fan of the new GFE approved by the Consumer Finance Protection Bureau (which is technically called the “Loan Estimate”). There are some great changes appearing in the new GFE. These include, but aren’t limited to:

  • the loan terms are listed out in a easy to read summary on the first page
  • there is a place to show any seller contribution to closing costs and/or lender credits
  • an estimated cash to close is listed on both pages 1 and 2
  • there is an itemization of both closing costs and prepaid items on page 2
  • the Truth in Lending disclosure is being combined into the new GFE on page 3
  • there is a signature line on the good faith estimate (imagine that!)

 

It is great that clients can now actually sign the good faith estimate, which will eliminate a fourth page that lenders had to add on for borrowers to sign stating they receiving a copy of the GFE. Combining the details of the GFE, Truth in Lending, and providing a signature line, the new GFE actually reduced the number of pages from six to three. Less paper!

Click the link to view the 2015 GFE.

One aspect that is new is the replacing of the terms “closing costs” and “prepaids.” Historically, closing costs were the costs associated with the home purchase. These include lender fees, attorney fees, appraisal fee, title insurance, etc. These fees can differ from lender to lender.

Prepaids typically referred to setting up an escrow account, paying a full year of home insurance, and paying interest on the loan from the date of closing until the end of the month. These fees were the same regardless of the lender used for the transaction. Now the sum of all fees is referred to as closing costs, and there are two new categories:

  1. Loan Costs: this is the total of lender fees, third party fees (appraisal, credit report, etc.), and attorney fees.
  2. Other Costs: this includes insurance, escrow set up, taxes paid to city/state/county for purchasing a home, recording fees, HOA fees (if applicable), prepaid interest, etc.

That said, the 2015 GFE seems easier to read, understand, and contains all the needed information in one document. This is much better than referring to the GFE for terms of the loan, the Truth in Lending for the APR, the Fee Itemization worksheet (2 pages) for an itemized breakdown of closing costs along with the cash to close. Here is one part of the change that most are excited about coming to fruition. Next time we’ll focus on a change no one wants to see implemented.

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More changes on the way

March 24, 2015
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There is more than just pollen in the air… change is in the air too!

Starting in August 2015, the Consumer Finance Protection Bureau (CFPB) will reshape the way loan terms and details are disclosed to borrowers. This is the second change being made to the Good Faith Estimate and the HUD-1 (settlement statement). The original change turned the Good Faith Estimate from a one page document into a three page document. The HUD-1 only increased from two to three pages.

This time the Good Faith Estimate will stay at three pages. The HUD-1 will increase from three to five pages!

I’ll spend a couple posts discussing the new Good Faith Estimate and the HUD-1. Today, we’ll focus on when to get started with the Good Faith Estimate.

Currently, the main time period Lenders must be aware of is the 3 day disclosure requirement from the time a loan officer receives 6 crucial pieces of information. Once these 6 things are provided, we now have an official loan application.

  1. Borrower(s) Name
  2. Borrower(s) Income
  3. Borrower(s) Social Security Number
  4. Property Address
  5. Estimated value of the property being purchase (or refinanced)
  6. Mortgage Loan Amount.

Once there is an official loan application, a borrower should be given a Good Faith Estimate within 3 business days. There are still requirements for re-disclosing terms of a loan should the rate change or APR increase more than a certain amount during the loan process.

These aspects of the loan process are not changing, but change is coming. Next time, we’ll move into the ins-and-outs of the new Good Faith Estimate.

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Using APR to find a “great deal”

May 8, 2012

Last year I blogged about whether or not APR really showed the “truth in lending.” You can see that post from my blog here. Recently I ran across a post by Dan Green from @mortgagereports. Dan is a loan officer in Ohio, and had some great points about APR. Here are some of the highlights of his detailed post (for the entire post, go here). Take it away Dan…

It’s a myth that you can shop for a mortgages using Annual Percentage Rate (APR) calculations. No matter what your loan type — FHA, conventional loans, VA, USDA or jumbo — APR is among the most easily manipulated numbers in the mortgage business and some lenders count on you not knowing that.

APR is a government-created math formula. It’s meant to measure the “true cost” of a loan, from the date of closing to the date of payoff. APR is roughly measured by taking the original loan size, accounting for closing costs and prepaid items, then estimating how much will have to be paid over 30 years to pay off the loan in full. APR answers the question, “If I borrow this much money, and it costs me this much to pay off my loan, what would my theoretical mortgage rate have been?

By showing APR along with every rate quote, it’s believed that customers will be better informed and can make better loan choices. In some cases, this is true. In many cases, it is not. APR is not the apples-to-apples comparison tool it’s advertised to be. This is because the loan with the lowest APR isn’t always the loan that’s best for you.

Banks and lenders love to promote their “low APR loans” — especially online. Unfortunately, getting a low APR doesn’t translate to getting a “great deal”. This is because the APR formula is flawed.

Calculating for APR requires a lender to makes serious assumptions about the future and, as we all know, predicting the future is impossible. For example:

  1. The APR formula assumes that you will hold your loan for 30 years
  2. The APR formula assumes that you will never make extra principal payments of even $1
  3. The APR formula assumes that you will not refinance or sell your home
  4. The APR formula uses third-party loan costs (appraisal, attorney fee, title search, etc) which are sometimes unknown. These fees are estimated, which means the APR is estimated and can appear artificially low.
  5. The APR formula struggles with adjustable-rate mortgages because it makes assumptions about how the loan will adjust during its complete, 30-year term. Will mortgage rates rise over 30 years? Will they fall? By how much will they rise or fall? Two lenders using two different set of assumptions will publish two different APRs — even if the loans are identical in every other way.

If any of these statements are “untrue”, or have the chance of being untrue, APR fails as an apples-to-apples comparison tool. This is a huge deal when comparing loans with discount points to loans without discount points.

For example, as compared to a loan with no discount points, a loan with discount points will have higher closing costs but lower principal + interest payments each month. Over the life of the loan, the lower payments will render the loan with discount points “cheaper” and so it will have a lower APR than the low-fee mortgage choice. If you chose your loan strictly by APR, you would end up choosing the loan with the highest closing costs and the best long-term payoff.

Don’t get me wrong, this is fine if you plan to stay in your home for 30 years and never make extra payments on your loan. However, if you plan to sell in fewer than 30 years or make extra payments, the APR comparison weakens. In this case, buying by APR isn’t the best way to shop — you’ll front-load your mortgage with fees.

The important thing to remember is that APR is not the metric for comparing mortgages — it’s merely a metric. The better way to compare two mortgage rate offers is to look at the mortgage rates as compared to the fees…

Thank you for the great insight Dan. I couldn’t have said it better myself!

If you’ve been shopping by APR, and would like to have a fresh look comparing rate and closing costs, feel free to contact me to get started. If you are buying in the state of Georgia, I can help!