WASHINGTON The new mortgage disclosure regime taking effect in October may lead lenders to temporarily extend rate locks and the time allowed for loan closings.
A typical loan closing takes 30 days, and the borrower will lock in the interest rate for that amount of time. But the strict requirements on the accuracy and timing of borrower disclosures prescribed under the new regime supervised by the Consumer Financial Protection Bureau have industry observers suggesting lenders will need to extend rate locks and closings by as much as 15 days or even more.
The Truth in Lending Act and Real Estate Settlement Procedures Act integrated disclosures known as TRID include a new form called the Closing Disclosure to replace the current HUD-1 settlement statement. While the current form can be revised and delivered up to the day of settlement, the new form must be finalized and in the borrower's possession three days before closing.
With lenders mailing forms eight to 10 days or even longer in advance to ensure prompt delivery, some worry the amount of time for processing loans will be constrained, particularly when originators must get approval from loan acquirers on terms.
"That is why writing a 30-day contract is going to be very difficult in the purchase mortgage space," said Glenn Brunker, president of BOK Financial Mortgage in Tulsa, Okla. "The industry will have to migrate to a 45-day lock and a 45-day contract."
Yet Brunker said a longer period may be necessary just on a temporary basis. "We will be looking to identify operation enhancements to return to a 30-day offering once we adjust to the new process," he said.
Ken Trepeta, the new president and executive director of the Real Estate Providers Council, has been warning real estate agents that the traditional 30-day contract might not provide enough time to complete the closing. He says real estate agents should consider adding 15 days to their sales contracts to account for longer closing times.
"Just to be safe in the beginning, given all the uncertainties, 15 [more] days is a good idea," said Trepeta, who previously worked at the National Association of Realtors.
Trepeta has also warned real estate agents that lenders may no longer automatically accept last-minute changes to the Closing Disclosure, which could further delay closings.
However, not everyone is officially on board with extending the windows. For one thing, the Realtors have not endorsed the idea of moving to a 45-day contract, according to a spokeswoman for the group.
But some industry experts say even longer extensions may be necessary.
Tammy Butler, director of fair lending and compliance at Optimal Blue, which provides mortgage product and pricing software, said she expects lenders will be very conservative coming out of the gate. If they need 30 days to close, they might use a 45-day rate lock, or even a 60-day rate lock for a 45-day closing period, Butler said.
Lenders will be conservative until "they know how the infrastructure is going to handle all of this," she said in an interview.
Meanwhile, shorter rate lock periods now available in the market for example, one only allows a rate to be locked in for 15 days may be eliminated altogether because lenders "feel it is way too short of a time frame," Butler said.
Pete Mills, a senior vice president for the Mortgage Bankers Association, agreed that real estate agents are likely to be cautious and go with a 45-day contract "until things are worked out and people get used to the new processes."
They just want "a little extra time especially in the immediate post-Oct. 3 period," Mills said. "If the Realtor writes a 45-day contract and the borrower wants to lock in the date of application, he should probably get a 45-day lock."
Mills and others noted that a longer rate-lock period has costs. Typically, borrowers must pay a fee to shoulder lender costs associated with locking in an interest rate. With a longer lock-in period will likely come higher fees, said Richard Andreano, a partner at Ballard Spahr.
"A 30-day lock at the time of application will likely not be sufficient in many cases," but a 45-day lock may be more expensive, Andreano said. "We will have to wait and see what lenders do with lock periods."
The borrower will also have to weigh the costs and advantages of a longer period, he added.
"The consumer will have to assess locking at the time of application at the 45-day lock rate, or waiting a few weeks to lock at the 30-day rate," Andreano said. "Waiting two weeks presents a risk of a higher rate environment at the time of lock."
Rod Alba, senior vice president for residential finance at the American Bankers Association, said while banks may be considering rate-lock extensions, now they will likely not formally execute a longer period until they see that TRID is actually resulting in processing delays after Oct. 3.
"It will be based on the experience the lenders are having. But right now they are not going to change," Alba said.