The Consumer Financial Protection Bureau’s “Know Before You Owe” mortgage rule is designed to ensure lender transparency to borrowers. The rules were originally written as part of the Dodd-Frank Act and took effect on October 3, 2015.
By: Sebastian Tennant |U.S. Gov Connect
Article By Patrick Mansfield | U.S. Gov connect.
“Know Before You Owe” means that borrowers receive two important disclosures:
1) A borrowers’ document after applying for a mortgage loan.2) An easier to understand and use closing document, known as the Closing Disclosure, at least three days prior to closing date. Advance receipt of the Closing Disclosure gives borrowers time to better understand mortgage terms and costs:
• Three business days are provided for the mortgagor to review the Closing Disclosure. Time before signing the mortgage loan documents protects the mortgagor from closing surprises.
• The extra time allows mortgagors to ask an attorney or other counselor questions about the mortgage terms.
• Most people will not have a delayed closing date as a result of the new disclosures.
Lender Transparency and Borrower Evaluation
The lender must provide three additional business days to mortgagors to review an updated mortgage loan disclosure if any of these essential loan elements are changed from the date of the borrower's original mortgage application:
• An annual percentage rate (APR) increase of more than one-eighth of a percentage point for a fixed rate loan.
• An annual percentage rate (APR) increase of more than one-fourth of a percentage point for an adjustable rate loan—Decreased APR or fees do not cause a closing delay.
• An addition of a pre-payment penalty.
• Loan product changes, such as change from a fixed rate mortgage to an adjustable rate mortgage.
Other items that will not prompt a three-day review period include typographical errors on forms, walk-through discovery issues, or changes to the payments made at the closing, such as changes requiring seller credits.
The Consumer Financial Protection Bureau drove this important change to help consumers better understand mortgage loans. After the Great Recession of 2008, many consumers complained that lenders switched a fixed rate loan product to an adjustable rate mortgage, or raised fees and costs from the time the borrower filled out a mortgage loan application to the closing date.
The new rules took lending institutions years to implement. The lenders cited technology and man hour costs as reasons for the greater than four year delay. The new law supports mortgagor rights and the ability to achieve the American dream of home ownership.
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