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New Lending Disclosures Causing Confusion

07/30/2015

Because there is confusion over the upcoming consumer disclosure rules, at least one primary lender is retreating from some loan products. Created by the Consumer Financial Protection Bureau, the rules have not yet gone into effect but Wells Fargo, one of the biggest mortgage lenders in the country, has already advised correspondent lenders that based on the proposed changes, after August 1, it will no longer purchase single-close construction loans used for homebuilding.

Bowing Out

Wells Fargo is one of the biggest investors in single-close construction loans, the bank’s decision could dramatically reduce the availability of these loans. However, as explained by Joshua Weinberg, senior vice president for compliance with First Choice Loan Services, something else to consider is that with Wells Fargo being an industry leader, other banks will follow suit.

A single-close construction loan is designed to allow borrowers to close on short-term construction loans used to cover expenses during the building phase coupled with a longer term and permanent financing as one transaction. Being an “all in one” option is not only less expensive but also more convenient than going through two closings.

As to how lenders will handle the loan disclosure under the new regulations along with stand-alone construction loans remains unknown. Weinberg added that anytime gray areas exist, lenders typically get away from the margins to ensure no compliance violations occur. In other words, these new disclosures are leaving many lenders feeling nervous.

Pressure from Industry Leaders

On the other hand, things might ease up within the next several months. Pressure from industry lenders will increase, which included lenders who sent warnings that some lenders were simply not ready for significant change. These lenders also pointed out that consumers could ultimately suffer from the changes. In response, implementation of the plans has been postponed from August 1 to October 1.

According to Richard Cordray, director with the Consumer Financial Protection Bureau said that after the new rules go into effect, lenders would have the chance to adjust during a good faith enforcement grace period.

Cordray explained that the new rules were designed to create more transparency for the mortgage loan process. With this, consumers would be provided with forms that are easier to complete and be given additional time to look over the final loan terms prior to closing. These rules consist of 1,900 pages that will be integrated into the Truth in Lending and Real Estate Settlement Procedures Act.

Typically, construction loans and other short-term financing is 12 months or less. The issue is that while these loans are not part of the current disclosure requirements they would be under the new rules. With August 1 fast approaching, adequate time would not have been available to fully understand and implement the new rules.

The bigger problem is how single-close construction loans will be disclosed since the construction portion is usually interest only while permanent financing is at an adjustable or fixed rate. Another aspect of the new rules that are unclear is how the requirements will apply to co-op financing.

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