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Know Before You Owe rule aims to bring clarity to mortgage loan process

By Taryn Phaneuf | Apr 15, 2016

WASHINGTON (Legal Newsline) - The Consumer Financial Protection Bureau says it is working with those who offer construction loans to ensure its new "Know Before You Owe" rule is implemented smoothly.

The TILA/RESPA Integrated Disclosure (TRID) rule, also called the Know Before You Owe rule, took effect last year. The rule was written to make the mortgage process more clear for consumers by consolidating information in the Truth in Lending Act and the Real Estate Settlement Procedures Act.

The Consumer Financial Protection Bureau believes streamlining the information will help consumers better understanding their loan options, choose the mortgage loan that’s best for them and avoid costly surprises at closing.

The rule throws out old disclosure forms and presents two new ones: the Loan Estimate and the Closing Disclosure. The rule also requires a consumer to receive three days to review the closing disclosure.

“The Bureau has been working closely with market participants to monitor progress and ensure a smooth and effective implementation of the rule,” CFPB spokesperson Samuel Gilford told Legal Newsline. “As part of this work, we are continually monitoring the secondary mortgage market to fully understand the impact of our new rules.”

Some in the mortgage industry haven't been pleased with the level of guidance on the rule. In a blog post on Ballard Spahr's CFPB Monitor following the January release of a fact sheet about the disclosure of construction-to-permanent loans under the rule, attorney Richard J. Andreano said the fact sheet wasn’t enough because it “does not provide detailed guidance” for mortgage industry professionals.

A construction-to-permanent loan is a single loan in two parts. The first phase covers the construction of a home. The second starts when construction is complete. A previous rule allowed a construction-to-permanent loan to be considered as a single transaction or two separate transactions if the financing for both phases is provided by the same creditor.

Under the Know Before You Owe rule, the two phases can be disclosed simultaneously or separately.

At the end of the fact sheet, the CFPB includes a note stating it would consider offering further guidance to help the mortgage industry comply with the new rule. On March 1, the bureau hosted a webinar addressing this particular type of loan under the disclosure rule.

A survey in February highlighted other concerns surrounding the new rule. The American Bankers Association surveyed 548 people in the residential mortgage lending market and found that two-thirds had experienced increased legal and regulatory costs while implementing the rule. More than three-quarters reported delays in closing.

The CFPB is still devoting its resources to helping those in the industry implement the rules, Gilford said.

“The Bureau recognizes industry has dedicated substantial resources to understanding and meeting the requirements of the rule. The CFPB also continues to assess how we can best provide guidance to market participants going forward,” he said.

Another concern, that investors in the secondary market are rejecting loans because of compliance problems and document errors, should work itself out, he said.

“If investors were to reject loans on the basis of formatting and other minor errors, they would be rejecting loans for reasons unrelated to potential liability associated with the Know Before You Owe mortgage disclosures,” Gilford said.

“Such decisions may be an overreaction to the initial implementation of the new rule, and our assessment is that these concerns will dissipate as the industry gains experience with closings, loan purchases, and examinations.”

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