In just over two months, The Dodd–Frank Wall Street Reform and Consumer Protection Act's Loan Estimate and Closing Disclosure requirements take effect. While the rules will have a direct impact on mortgage lenders and title agencies, builders won't be left unscathed.
"This rule constitutes a sea change for lenders, settlement service providers, real estate agents, and consumers," says Ken Markison, vice president and regulatory counsel at the Mortgage Bankers Association.
At their heart, the controversial rules aim to provide a clearer closing process for the home buyer by combining the Good Faith Estimate and initial Truth-In-Lending disclosures into one document--a "Loan Estimate" form. That document must be provided to the customer no more than three days after the application.
The big hiccups, however, won't be likely to occur until the end of the closing process. The Final Truth in Lending Disclosure and HUD-1 Settlement Statement are being replaced by the "Closing Disclosure," according to the The National Association of Home Builders (NAHB). While the HUD-1 can be presented on the day of closing, the Closing Disclosure must be provided three days before closing.
"The big change will be that lenders will have to react quickly to any changes that happen in the last week or so before the closing date," says Michael Sullivan, general counsel for Pulte Mortgage, a subsidiary of PulteGroup. "The new rule imposes very strict disclosure requirements on lenders during that last phase of the transaction."
If there are changes to things like annual percentage rate, loan product adjustments, or prepayment penalties added, closing could be delayed.
"Any changes that happen after those closing disclosures are given to the consumer may be difficult for the lender to address in time to meet the original closing date," Sullivan says.
A Builder's Responsibility
The Dodd-Frank changes put pressure on builders to make their lenders aware of any changes to the contract or any change orders at least a week before closing.
"If items start moving as a result of the builder or consumer changing something, that can really affect the ability of the lender to close," Sullivan says. "To the extent a builder can finalize the contract terms at least a week before closing and make sure that the closing date is scheduled with a degree of finality, they'll be in good shape on the lending side."
If a closing is delayed, there will be repercussions for the builder. "Because the builder has to carry a fully built home on its books for extra days, there are carrying costs associated with that time," Sullivan says.
But customer service issues might be a bigger concern. "There are also customer service issues that come with consumers scheduling things like moving trucks, appliance deliveries, and cable service," Sullivan says. "If those closing dates change it means increased carrying costs for the builder and a terrible inconvenience for the consumer."
At this point, the main thing builders can do is stay in touch with their lending partners, realtors, customers, and settlement agents. And they need to stay informed. The NAHB will be offering a webinar on June 24th to help builders get up to speed.
"In many cases, there's not a whole lot the small and mid-sized builder can do other than be as prepared as they can," says Steve Linville, director of single family finance at the NAHB. "We're stressing that they be aware of what's going on and communicate clearly to their partners so there are no surprises."