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Where Have All the Loan Docs Gone?

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Posted On: 07/22/2015

QUESTION:

We understand that the Good Faith Estimate of closing costs will soon be gone and the same with the Truth in Lending Form and the HUD-1. What happened and do consumers benefit?

ANSWER:

I know this is about to get complicated because government rules, fancy paperwork and lots of arguments are involved, but bear with me, there’s an actual answer to the question and a real advantage with the new forms.

Decades ago, in an effort to help buyers, sellers and borrowers better understand real estate transactions, the government passed the Truth in Lending Act (1968) and the Real Estate Settlement Procedures Act (1974). From these rules we get the Good Faith Estimate and Truth-in-Lending forms, in addition to the HUD-1 we use for settlements.

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These forms have been used in tens of millions of transactions, but starting in August they will be replaced with new documents. Here’s what’s expected to happen at this writing:

First, the Good Faith Estimate and the initial Truth-in-Lending disclosure have been combined into a new form, the Loan Estimate.

Second, the HUD-1 and final Truth-in-Lending disclosure form will be combined into another new form, the Closing Disclosure.

Third, according to the Consumer Financial Protection Bureau, the new Closing Disclosure form must be “provided to consumers at least three business days before consummation of the loan.”

Why the revisions?

Over a period of more than 45 years the lending industry has changed. There are a lot of new and very different mortgage products available today when compared with the Vietnam War era. To keep up with the times the forms needed to evolve.

Did the forms evolve in the right way? Are the new forms any good? Time will tell. On one side, at least, there is a plain benefit for consumers, the idea that borrowers must be able to see their closing papers three full business days before closing. Under RESPA, settlement providers have been required to provide preliminary documents 24 hours before closing – but only at the request of the borrower. If there was no request, there were no documents in advance. With the new rule closing surprises will be a thing of the past because there’s no request requirement and the notice period has been tripled.

Alternatively, lenders are unlikely to be thrilled with the new paperwork. In particular, the new Loan Estimate form states that by signing the borrower is “only confirming that you have received this form. You do not have to accept this loan because you have signed or received this form.”

In other words, borrowers might well go to another lender if they can get a better deal that will be approved before closing. Borrowers have always had this right but now it’s spelled out in plain language and just above where the form is signed.

For more information and details, speak with lenders, real estate brokers and closing agents.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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