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More Changes in Lending, Part 1

Paul Trotsky, VP, Northview Bank

Yes it is true, mortgage lending is changing again! We all remember the “mortgage meltdown” that started in 2008. As a result of the mortgage meltdown, Congress signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of the most important aspects of the Dodd-Frank reform laws was the creation of the Consumer Financial Protection Bureau, also known as the CFPB. 

One of the first things those of us in the real estate business saw the CFPB implement was the revised Good Faith Estimates and the revised HUDs, which fall under Regulation X (the Real Estate Settlement Procedures Act). The CFPB also revised Truth in Lending Act (TILA) documents, which fall under Regulation Z. 

These changes were implemented in 2010. I am guessing everyone in real estate will recall having some concern and confusion about what these changes would do to our business model, our ability to close on real estate sales, and the ability of buyers to finance. 

The changes had a long-term effect of adding about a week to the lending process. It became nearly impossible to close a residential sale with financing under a three-to-four-week window due to the new mandated federal disclosure and waiting period regulations. Some transactions that would have closed previously did not close at all. In general, the transactions that did not close were likely to consumers that may not have been ready to be responsible consumers of real estate and mortgage products. 

By now the changes implemented in 2010 are old hat, just part of everyday life. We learned the rules and now we work with the buyers, our settlement service providers, and our lending partners to successfully navigate these changes. 

January 2013 brought another round of significant changes implemented by the CFPB. The foremost new requirement was the Ability to Repay/Qualified Mortgages requirement, though it was not the only one. Eighteen months ago these changes caused me (and many other people) sleepless nights. 

Now lenders could not approve loans to consumers with debt-to-income ratios over 43%. Consumers not only had the right, but were required to have a copy of the appraisal on the home they were buying several days before closing—this along with several other changes. Again we saw consumers using lending products to purchase have a little slower closing times due to the expanded federal disclosure and waiting period regulations. 

The additional requirements further slowed the lending process, making it difficult to close a sale with financing in under 30 days. The rules also likely caused a few buyers to not be able to buy due to debt-to-income reasons, low credit quality, inconsistent income, or other reasons. Many of the consumers who were denied credit maybe should wait a little while before proceeding with the purchase of real estate through mortgage products. Once again we learned the rules and now we work with buyers and our lending partners to successfully navigate these changes. 

October 2015 will bring another round of changes for mortgage lenders as TILA and RESPA rules are changing again. (The changes were originally set for August 2015, but CFPB felt this was a little aggressive and thus delayed implementation until October.) 

Under these changes The Ability to Repay and Qualified Mortgages are still relevant. RESPA and TILA are changing again and will require disclosures, a wait period, redisclosure, another wait period, and then closing. The redisclosure and wait periods will likely add one to two weeks to the lending cycle and your sales cycle timeframes, making it difficult—if not impossible—to close sales that include financing in less than five or six weeks. And again, because federal regulation requires additional discourse and waiting periods, the closing timeframes will be extended. 

The changes will affect nearly every consumer purchase of real estate that will be financed with a mortgage product. It will slow the ability to close bare land purchases, three-season cabin purchases, nonconventional home purchases, and conventional home purchases that require financing.  

Previous changes had little effect on bare land/lot mortgage products. The new pending rules, however, will apply to real estate with dwellings as well as real estate like acreage or building lots. I would suggest that you communicate with your settlement providers/title companies and lending partners to get a feel for their readiness for these changes. Communicate with your real estate sellers, staff, and buyers, to let them know that the lending process that used to take three to four weeks will now require four to six weeks. 

Again I suggest that we put the intent of the changes into perspective. The changes are for the benefit of the mortgage consumer. We are all in favor of consumers being educated about the mortgage products they are using. We may not agree with the CFPB’s design of how to ensure all consumers are educated and responsible users of mortgage products, but we can certainly all agree that we want our consumers to be educated in the mortgage products they use. The education will help ensure they are responsible users of credit and therefore more likely to be repeat buyers of real estate and mortgage products. 

The first couple of months of these changes will, no doubt, cause some of us to lose sleep. Some transactions will not close. And in general, we’ll feel a considerable amount of additional stress. But in a year—or maybe in five years—we will look back on these days and say we survived. We may even look back on these days and say it was not as bad as we expected. And one thing we can all be sure of, mortgage consumers are better educated and protected today than they have ever been.  

The intentions behind the Dodd-Frank laws and the CFPB are important—they are intending to protect consumers. Of course all of us operate with a high level of integrity and want our consumers to be responsible users of credit products. If they are responsible today, they are more likely to be a client for us tomorrow. 

This is the first of a three part series.