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The “Know Before You Owe” Rule: New Rules & Forms in Residential Home-Buying

Norman D. Farnam

Jennifer M. Luther

September 17, 2015

The Know Before You Owe mortgage disclosure rule, also referred to as the TILA-RESPA Integrated Disclosure rule, is now set to go into effect on October 3, 2015, after several delays. The new rule is intended by the Consumer Finance Protection Bureau (“CFPB”) to clarify and consolidate the informational forms currently required to be given by lenders in many consumer credit transactions secured by real property and to give borrowers more time to review the information provided. The new rule will also allow borrowers to comparison-shop for home loans before being required to commit. This article provides a brief overview of the new rules.

The Know Before You Owe rule is intended to make mortgage disclosure forms clearer, simpler and easier to understand for homebuyers by combining several forms and statutory disclosure requirements into two forms – the Loan Estimate form and the Closing Disclosure. Under the law in effect prior to October 3, 2015, borrowers receive a Truth-in-Lending statement and a Good Faith Estimate in conjunction with the loan application process, usually after making a commitment to the application process. The borrower receives a final Truth-in-Lending statement and HUD-1 settlement statement at the time of closing. These forms can be challenging for borrowers to understand, often offer duplicative information, and have been known to contain surprises.

The Loan Estimate form replaces the initial Truth-in-Lending statement and the Good Faith Estimate. It provides the borrower with the basic terms of the proposed loan as well as the cost of the loan transaction. Perhaps the biggest change, however, is not in the Loan Estimate form itself, but in the lending procedure. Once a borrower provides a lender with basic information required by the new rule (name, income, Social Security number, amount to be borrowed, and address and estimated value of home to be purchased) the lender has three days to provide the Loan Estimate to the borrower. The lender cannot require additional information at this point (although the borrower can voluntarily provide it) and cannot charge a fee except a fee for a credit report. This is significant because it enables a borrower to shop around by requesting Loan Estimates from multiple lenders without making a commitment.

It should also be noted that the Loan Estimate does not commit the lender either. The lender has not approved or denied a loan; the lender only has committed to lend, if at all, on the terms contained in the Loan Estimate assuming no change in circumstances. The borrower will have 10 business days to advise the lender of the intent to proceed. At that point, the lender can charge fees and start collecting additional underwriting materials from the borrower.

The Loan Estimate can be revised during the underwriting process if circumstances change in a way that is not insignificant. Examples given by the CFPB of changes that may require the reissue of a Loan Estimate include a change in the borrower’s credit status, difficulty by lender in verifying borrower’s income, or variance between the estimated value of the property and the appraisal results. Lenders are entitled to time to respond to changes in circumstances.

The Closing Disclosure replaces the final Truth-in-Lending statement and HUD-1 settlement statement. To give the borrower a chance to review the closing terms without the pressure of an imminent closing, the new rule requires that the Closing Disclosure must be provided three business days prior to closing. The Closing Disclosure will include the amount of the loan, the interest rate, the monthly payment, if private mortgage insurance (PMI) applies and when that drops off, the closing costs and the amount the borrower must bring to the closing.

Critics of the new rule have pointed to the reality that most closings, prior to October 3, 2015, involve changes, particularly tinkering with the HUD-1 settlement statement, right up to closing. The new rule provides that a significant change to the transaction will require a new three-business-day review period for the borrower, which cannot be waived by the borrower. The CFPB insists that such changes should be rare and, therefore, an extra three-day review period will be unlikely. Changes that will require a new Closing Disclosure include:

  • Changes to the loan’s APR;
  • Changes to the loan product; or
  • The addition of a prepayment penalty.

After October 3, real estate professionals will want to be especially proactive in moving things along in anticipation of closing. Delays may come with more significant consequences. For example, back-to-back closings involving a common party could fall apart if deadlines are not met.

The new forms should help consumers better understand their loan terms. If real estate professionals take the time to become informed about the new rules that come with those forms, and prepare themselves and their clients, transactions will hopefully continue to go smoothly after October 3. For more information about the new rules and to view samples of the new forms, visit: www.consumerfinance.gov/knowbeforeyouowe/.


If you have any questions about how the information in this article may affect you or your business, please contact Norman Farnam at nfarnam@stroudlaw.com or Jennifer Luther at jluther@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.