New rules and enforcement mechanisms established by the Consumer Financial Protection Bureau (CFPB) will alter the real estate process in New Jersey and elsewhere. Understanding the CFPB and what changes can be expected, including requirements for internal financial controls, handling of privacy issues, as well as the new settlement forms being introduced will be critical in being compliant with future real estate transactions.
Attorneys who represent clients buying and selling real estate must prepare for significant changes in the real estate settlement process. Attorneys who intend to continue to act as settlement agent on residential real estate transactions will need to adhere to new standards developed by the American Land Title Association together with the lending industry. These “Best Practices” will be the foundation of a compliance regime lenders are requiring to satisfy their obligations to the consumer under the new regulatory environment.
Specifically, Sections 1098 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) direct the CFPB to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act (Regulation Z) and the Real Estate Settlement Procedures Act (Regulation X). Consistent with this requirement, the CFPB is amending Regulations X and Z to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements imposed by the Dodd-Frank Act, the final rule provides extensive guidance regarding compliance with those requirements.
What do these rules mean for the consumer? They will simplify and improve disclosure forms for mortgage transactions. Consumers currently receive different, but overlapping federal disclosure forms with the terms and costs of mortgage
loans. Because these forms are confusing for many people, Congress directed the Bureau to create new forms. The rule replaces the current forms with two new forms: the Loan Estimate, given no more than three business days after application and no less than seven days prior to consummation (closing), and the Closing Disclosure, given at least three business days before closing. Lenders will be required to give consumers these forms for mortgage applications submitted on or after August 1, 2015. Specific benefits of the new forms and rules include:
- Combining several forms and additional statutory disclosure requirements into two
forms. This will reduce paperwork and consumer confusion.
- Using clear language and design that will help consumers understand complicated
mortgage loan and real estate transactions.
- Highlighting the information that has proven to be most important to consumers. On
the new forms, the interest rate, monthly payments, and the total closing costs will be
clearly presented on the first page. This will make it easier for consumers to compare
mortgage loans and choose the one that is right for them.
- Providing more information about the costs of taxes and insurance and how the interest
rate and payments may change in the future. This information will help consumers
decide whether they can afford the mortgage loan and the home, now and in the future.
- Warning consumers about features they may want to avoid, like penalties for paying off
the loan early or increases to the mortgage loan balance even if payments are made on time