You’re gonna be mad at us.
We wish there was something we could do about it, but there’s nothing. Maybe it’s sooner rather than later, but some of you are going to get angry.
And it’s not just Realtors. Your bank, your lawyer, all of us could play a part in a future less than pleasant event.
Beginning in late 2015, real estate transactions are going to happen in a substantially different way. I started in this business back in the early 90s, and this is the single biggest change I’ve seen for our industry. And it’s going to affect you.
Dodd-Frank and the CFPB
In 2010, President Obama signed into law the Wall Street Reform and Consumer Protection Act (also known as Dodd – Frank). Once law, Dodd-Frank brought sweeping change to financial regulation. It also gave birth to the Consumer Financial Protection Bureau (CFPB).
Dodd-Frank and the CFPB were created in direct response to the financial crisis that exploded in 2008. The law was designed to put more controls in place, and it created powerful penalties for intentional fraudulent practices. Why? The president and Congress wanted to stop another massive economic debacle.
By now, you probably know that the real estate market was a major ingredient in that meltdown. So our leaders made sure that there was more regulation there, too.
Like so many laws, the consequences of Dodd-Frank weren’t immediately apparent. But they’re becoming so. And there not all good.
The Financial Crisis
One of the overarching goals Dodd–Frank was to provide the public with adequate information so they would be less susceptible to financial predators—in the case of real estate, sleazy mortgage lenders.
In the years leading up to 2008, the real estate lending market was running wild, giving anyone with a pulse money in order to sell mortgages they could then sell to Wall Street institutions that created further distortions. People could borrow obscene amounts of money with no money down, pay very little interest (for a short time), all without ever having to shoe the wherewithal to pay the loan back. The loans were enormously risky but were packaged into securities that proved to be very valuable…to the banks that underwrote them.
Many books have been written that detail just how messed up this whole system was. For these purposes, though, you need to know only that this was a house of cards, and there was a big wind brewing to knock it down.
Know Before You Owe and TRID
It would be hard to say if this whole mess could’ve been avoided if borrowers better understood what they were getting into. But that doesn’t matter. I think it’s safe to say that something had to be done to the real estate lending market. That something is the CFPB.
In order to create an environment where consumers were far more certain about the products they were signing on for, the CFPB has adopted the philosophy of ‘Know Before You Owe‘ in an attempt to save borrowers from the evil lenders.
So cue TRID.
TRID is basically an acronym for the new integrated closing and disclosure statements that replace the HUD 1 form that the industry has been using for decades to close real estate transactions.
The CFPB has adopted a new approach that demands lenders embrace additional time, longer forms and harsh penalties to fix the ills. The agency is forcing lenders to revamp their practices and disclose more information far earlier in the process. If they don’t, big penalties will follow. The ideal situation is that borrowers have enough time to understand their financial commitments, and thus make it less likely that rogue lenders will push their luck and the boundaries of fair lending. Fines could be as big as $1 million a day for willful noncompliance.
Disclosure Earlier is Good, Right?
An informed consumer is a better consumer … we know this to be truth. And requiring lenders to disclose more and earlier is no doubt a good thing to do.
But the devil is in the details, and the details pose a problem. The CFPB has demanded two critical changes. The first change is the method of disclosure. Lenders will soon see a new closing statement, longer and more detailed. Effectively, the Truth in Lending Statement and the HUD 1 Closing Form (aka Closing Statement) are being merged into one humongo-form now called the Loan Estimate and Closing Disclosure. Some might argue—I’m not saying who—that this change annoys more than it repairs and will create more confusion than clarity…for attorneys, lenders, Realtors and the buyers and sellers.
The second, and far more sweeping, change is that a borrower must receive all of these documents no less than three days before closing. Gone are the days when the HUD would arrive 30 minutes prior to closing and everyone saw it for the first time when they sat down to sign paperwork and made any and all adjustments to the form while sitting at the closing table. The closing attorney (or title company) had the power to make insignificant adjustments to the closing statement in real time to fix errors or omissions. This can’t happen anymore.
You Only Hurt the Ones You Love
In a utopian type world, this would be awesome. Who wouldn’t want to have all the wrinkles ironed out early? Who wouldn’t want to have a few extra days to review the package and know that everything is going to happen as expected, error free?
But here’s the rub of this idealistic law — if the statement’s wrong, then an amendment triggers a new three-day review process.
So here’s how this starts to go bad: you’re doing a walk-through, you see that the shower head is actually broken and needs to be replacement and you agree with the seller to throw some money in escrow. Well, you’re probably not closing that afternoon (nor the following … nor the following) as even a relatively small change to the closing statement requires a 3 day review.
And guess what else – if something else comes up three days from then, and yes, you’re looking at another three days.
The ability to make last-minute adjustments to the closing statement and still close efficiently is pretty much gone. Instead, closing could be a painful, frustrating process because of these required three-day waiting periods.
This is going to throw a proverbial wrench into sequential closing system that has become essential to smooth real estate transactions. I’m sure you can see it now. If one sale’s proceeds that were to fund another purchase suddenly are held up for three days, a lot of transactions are going to stop in their tracks because of this legislation.
And don’t even start thinking about using an internet lender across the country. You’re asking to really inflict some pain on yourself.
Don’t get me wrong, I love the idea of full and complete disclosure. But CFPB isn’t the right way to go about it, and the people who came up with it are a little bit clueless about its potentially brutal impact. Removing the ability to make legitimate modifications to the closing statement is not consumer protection.
Marginal Buyers Lose
Buyers and sellers really depend on sequential closing. So do Realtors, lawyers, lenders, and all the other cogs of the real estate machinery. The three-day right to review is going to do far more than cause a bunch of people to tear their hair out. By outlawing legal tactics that are fair, benign, not very consequential—and absolutely necessary—this law is going to lead to some or all of the following:
- Discourage sequential closing and force buyers dependent on sale proceeds to stay in place
- Force many last-minute panic moves or late closing penalties on the marginal buyer
- Force buyers to waive errors on the closing statements due to penalties for non-performance exceeding the incorrect costs on the closing statement
I really don’t think that this is what Congress had in mind when they passed this law.
I am already rehearsing my apology.
I trust you can see how this is going to cause problems—big problems. And people are going to become very unhappy. Closings delayed. Moving trucks stalled. Disappointment galore.
Sorry. I really cannot help.
I fully expect to take many daggers because of someone else’s mistakes and there will be nothing that I can do about it. Nor can the attorney, nor can the lender.
Will consumers have some more protection? Sure. Will that protection outweigh the damage caused by this slapdash process. Not likely. Many of the most culpable lending institutions that caused the crash are no more. Enacting rules to prevent their fraudulent practices is akin to closing the barn doors after the horses are long gone.
This law is in the books now. And even though many of the perpetrators of fraud that brought it on are no longer in the business, it’s many of the good guys who will have to live with the consequences.