Wednesday, July 1, 2015
Orlando REALTOR® | July/August 2015
A stack of impending changes to required disclosure forms and rules will impact all closings that involve a mortgage
Major changes are coming soon* to the real estate transaction. Any transaction involving a mortgage will use the new disclosure forms created by the Consumer Financial Protection Bureau (“CFPB”). This article will briefly summarize the changes and then focus on how the changes will affect form contracts.
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The Truth-in-Lending Act/RESPA Integrated Disclosures (“TRID”) also creates timing requirements for the disclosures that lenders need to make to consumers. And even the relationship between the lender and other parties such as the closing agent and the mortgage broker is now altered because the lender can be liable if certain costs exceed the tolerance limitations set forth in the TRID. In addition, the changes may also delay a transaction if certain changes occur near closing, as TRID requires a three-day waiting period prior to closing and certain changes may cause lender delays.
Through the Dodd-Frank Act, Congress ordered the creation of TRID in order to improve the loan disclosures made to consumers. TRID combines the prior TILA and RESPA disclosures into two forms: the loan estimate and the closing disclosure. The new forms are required to be used in all transactions starting at a date to be determined, and cannot be used for transactions prior to that date.
TRID contains many intricate requirements for the disclosure form. There are also tolerance limitations that may require a lender to refund fees paid by a consumer if the actual costs paid exceeds the estimated costs by certain factors.
The REALTOR® Position
NAR supports a RESPA-TILA integration that adds transparency, simplifies disclosures, and reduces burdens to settlement service providers including real estate professionals. The Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) are confusing statutes with sometimes conflicting disclosures and procedures. A single reformed set of rules and initial disclosures would benefit settlement service providers and consumers and improve the settlement process.
When the Consumer Financial Protection Bureau (CFPB) issued its final rule to harmonize the RESPA/TILA disclosures and regulations, it addressed many of NAR’s major concerns with the proposed rule.
First, CFPB significantly changed the proposed three-day waiting period to close transactions. That stipulation now only applies to major changes to the mortgage such as a change in the annual percentage rate (APR), the loan product itself changes (like a fixed rate loan becomes an adjustable rate or interest only mortgage), or the lender adds a prepayment penalty.
Second, CFPB also dropped the “all in” APR which would have changed the definition of the finance charge, which is used to calculate the annual percentage rate, or APR.
The loan estimate is how consumers will apply for a loan. A lender cannot charge a fee except for the credit report until after a consumer has received a loan estimate from a lender and has decided to proceed with the transaction. The lender must send the loan estimate within three business days after receiving application from a consumer and the final loan estimate must be issued at least seven business days prior to the closing.
The cost estimates used by the lender in calculating the loan estimate must be made in “good faith”, meaning that the numbers will be presumed to be based on the best information available and the lender may have to refund to the consumer certain amounts if the amounts vary between the loan estimate and the closing disclosure. A consumer has 10 business days after it is deemed to have received the loan estimate to decide whether to proceed with the transaction.
The consumer must receive the closing disclosure within three business days of closing. The closing disclosure captures all of the costs paid by the consumer, and so any alterations made at the closing table must be reflected in an amended closing disclosure following the closing. Three changes will require a new closing disclosure and will require a new three-day waiting period: APR changes by more than 1/8 percent; loan product changes; or a pre-payment penalty is added.
The new disclosure timing requirements will be addressed in form contracts provided by Florida REALTORS®.
One important issue that may need to be addressed is the buyer’s duty to close the transaction on a date certain. Since TRID may cause delays in the transaction through no fault of the buyer, purchase contracts need to be adjusted so that the buyer is not in breach of the agreement for not closing on a certain date. As stated above, TRID will cause a reset in the three-day waiting period in certain instances, but the lender may also cause delays due to the new tolerance limitations. For example, a problem with the home’s plumbing could potentially require the lender to seek a new valuation of the property, which in turn could require new disclosures and a delay in the transaction. Thus, the buyer’s obligation to close should not be required on a certain date since the potential for delays can cause this date to move.
In addition to the buyer’s obligation to close, all other timelines need to be reviewed. For example, a financing contingency that requires an immediate application by a buyer may not be practical, as the Loan estimate won’t be a final commitment by a lender and potentially is subject to change, like following the appraisal. In addition, a lender can’t charge a buyer for an appraisal until the buyer evidences intent to proceed with the transaction, which could be almost three weeks after the initial application.
A couple of other issues have arisen. A lender group is hoping to have licensee information captured in the purchase/sale agreement, as lenders need to have this information to complete the closing disclosure. Some lenders are taking the position that privacy laws restrict their ability to share the closing disclosure with real estate professionals and will only share the closing disclosure after consent is obtained from the borrower. NAR is investigating this issue.
Real Estate Professional Takeaway
While real estate professionals do not have any direct responsibilities under the TRID, they still have a role in the process. Real estate professionals need to educate their clients about what has changed and help them understand that the transaction will take longer. In addition, clients also need to be educated about the possibility for closing delays and so should be wary of scheduling back-to-back closings, as there is risk that one of the transactions may be delayed.
Finally, real estate professionals need to help their clients understand that attempts at last minute negotiations could derail the closing and so the parties should try to have all issues resolved well in advance of closing. In particular, changes made within the three-day waiting period could cause a delay to the closing.
*(A proposal under consideration by the CFPB will delay the current implementation date of August 1, 2015 to October 3, 2015.)