The newly approved HERA act or Housing and Economic Recovery Act begins on July 30th 2009. Not only is this going to affect the time frame on loan origination for us here in the Seattle home mortgage arena, this will affect the time frame on all loans originated in the entire nation.
Until now, when a loan officer prepared a loan application, there was a 3 day time period in which the loan officer had to send disclosures to the individual obtaining a home purchase or refinance. This was a requirement under TILA – Truth and Lending Act. It disclosed the finance charges, APR, amount financed, schedule of payments, and the total payments. During this time a loan appraisal as well as other items could be ordered on behalf of the borrower to move the loan forward in its process for a purchase or refinance transaction.
The HERA requirements with regards to the TILA, will change everything. The time frames accustomed to, and how the loan is processed. This affects every borrower on every loan with every lender. Under the new requirements the loan application form needs to be given to the borrower 3 days in advance of any fees being charged with the acceptation of the credit report. An appraisal or additional services cannot be ordered. The problem here is, how do you know the borrower has even reviewed the documentation?
Most lenders will do the following when it comes to HERA. To start the process they will consider a mail time of 3 days then 3 days of review time before an appraisal or other services can be ordered. This will add an additional 7 business days to the beginning of the loan process assuming, the lender mails out the TILA on the date the loan is first submitted to them.
Additionally, according to HERA, the TILA must now be within .125 percentage points of the originally disclosed APR rather than the traditional .25 percentage points of the originally disclosed APR. With such a tight APR requirement and keeping in mind that a GFE (good faith estimate) is just that an estimate, it will probably fall outside of the the .125% APR requirement. This will add another 3 days to mail disclosures to a borrower then 3 days to review for a total of 7 additional days at the end of the loan process. This total at the beginning and the end will add a minimum of 14 business days to the home purchase or home refinance process as we currently know it.
The final result here of course is the ability to sustain an interest rate that an individual may have locked a loan for. Most loan locks of 30 days will not be achievable. There are only 22 business days in a month, 30 day locks, incidentally, are not business days, but calender days. So you can see that there are only about 6 to 8 days for an individuals loan to be underwritten, conditions approved, docs ordered, escrow to be signed, a 3 day rescission period if it is a refinance, then closed. All of this must be achieved in order to maintain the lock period of 30 days.
This new legislation, will cause a higher cost, more paper work and ultimately more time to the home mortgage process regarding purchasing or refinancing a home.