A recent effort by the federal government to make the home closing process smoother and more transparent for buyers has instead turned into a quagmire of inconsistency and confusion, according to title companies and real estate agents.
The problem started in October when the U.S. Consumer Financial Protection Bureau (CFPB) introduced sweeping changes to the mountain of paperwork that consumers sign at closing when they purchase a home. The CFPB’s “Know Before You Owe” rule replaced key settlement documents with more user-friendly versions intended to give consumers a better idea of what they’re signing.
In the effort to replace the truth-in-lending statement and HUD-1 settlement statement, the CFPB unintentionally created a void.
The result: Many title companies now issue an additional closing statement at the time of settlement that they generate themselves or get from a national title association.
“The title industry does not like the way certain costs are disclosed on the closing disclosure form,” said Richard Horn, a former senior counsel and special adviser at the CFPB who was the lead attorney who oversaw the design and consumer testing of the new rule. “There are essentially two issues — the way title insurance policy rates are calculated on the closing disclosure, and the aggregation of certain costs, such as recording fees.”
In most jurisdictions, title companies offer a discounted or “simultaneous issue” rate when a lender’s title policy is issued in conjunction with a buyer’s policy. In the District, for example, on a sales price of $200,000 with a $190,000 loan, the cost for an owner and lender policy — when issued simultaneously — is $1,518 ($1,368 for the owner policy and $150 for the discounted lender policy).
If the lender’s policy were to be issued alone, the standard rate would have been $855. “The [new] closing disclosure statement does not allow for this calculation to be shown, causing confusion for buyers,” said Wayne Stanley, spokesman for the American Land Title Association (ALTA).
Lenders — unsure how to interpret the new CFPB rules — generally find it nearly impossible to get guidance from the agency, Horn said. “The rules can be difficult to interpret in some situations and the CFPB only gives guidance informally — often verbally — rather than in writing,” he said. “The lack of formal guidance has created uncertainty for lenders and investors.”
The new CFPB rule also requires lenders to furnish the documents to borrowers three days before the closing to give them ample time to review them. If one of three specific changes need to be made in the loan document, including switching from a fixed rate to an adjustable rate, the closing would have to be delayed until the corrections in the paperwork are made. The borrower would then be given another three-day window to review the documents.
Delays in the closing can create unintended additional costs to the lender.
“Implementing [the new closing process] has obviously not been easy for lenders,” said Matthew Lind, senior partner and founder of Stratmor Mortgage Finance Group, a leading consulting firm for the mortgage industry. “On average, since October 2015, [the new closing process] has increased lender back-office fulfillment and post-closing costs by an average of $209 per loan.”
“While [the new closing process] is making it easier for consumers to understand the costs and fees they’ll face at closing, the new rules are adding time and anxiety to the closing process,” said Brian Benson, chief executive officer at Closing Corp., a provider of residential real estate closing cost data and technology. Closing Corp.’s national survey found that 51 percent of repeat home buyers experienced unexpected “costs, fees, or surprises” during their most recent settlement.
Real estate agents, accustomed to receiving a copy of the now-phased-out HUD-1 settlement before closing, said they feel stymied by lenders refusing to provide them with copies of the closing disclosure.
Since implementation of the new rule, more than 50 percent of agents reported problems with getting closing documents, according to a National Association of Realtors (NAR) study in January. While the new rules do not specifically state that real estate agents are not allowed to receive a copy of the disclosure statement, most lenders take a cautious path and refer Realtors to the borrower or closing agent for access to the closing statement.
“NAR is working with industry partners to ensure that Realtors have access to the closing disclosures, just as they had access to the HUD-1 in the past,” NAR President Tom Salomone said. In the meantime, he said, agents will continue to request the disclosure from the lender and closing agent, as well as from their clients.
The CFPB, acknowledging that problems exist, recently announced it will draft as-yet-undisclosed rules associated with the “Know Before You Owe” procedures by late July. The proposals will be published in the Federal Register and comments from the public will be considered. The CFPB will then issue a “final rule” — with no guarantee on how many issues they will choose to address.
“We will continue to work with industry, consumers and other stakeholders to support a smooth transition for the mortgage market,” CFPB Director Richard Corday said in a letter responding to questions that Sen. Bob Corker (R-Tenn.) wrote him about the new regulations. The letter was published in the Title Insurance Industry’s newsletter.
“We also believe that there are places in the regulation text and commentary where adjustments would be useful for greater certainty and clarity.”
But that may not be enough, critics said.
The bureau should “put more boots on the ground,” Horn said, “and do more to engage with the service providers — the escrow, title and closing agents as well as the lenders — to provide guidance and education to facilitate compliance with” the new rule.
The CFPB rule “is impacting millions of Americans,” Corker said in a statement on his website, “and we must ensure it is implemented in the most transparent and effective manner possible.”
Sandy Gadow, author of “The Complete Guide to Your Real Estate Closing,” is a former title officer and licensed real estate agent with more than 20 years of experience. Gadow will answer readers’ questions in future columns. Contact her at email@example.com.