If you are in the market to buy or sell a home this year, be aware that the Federal government has implemented long awaited consumer-focused regulations, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.i As of August 1, 2015, creditors will begin to implement these regulations.
Gone Are the Days of Good Faith Disclosure and HUD-1 Settlement Statements
[Please note that implementation of the new regulations has been postponed until October 2015. KK 6/30/2015]
What does this mean to you, the purchaser or selling party? For those of you whom have purchased residential homes through mortgages issued by lending institutions, there are significant changes in the manner in which the terms of a loan will be disclosed, as well as the manner in which the closing costs will be disclosed. Gone are the days of both the Good Faith Disclosure and HUD-1 Settlement Statement.ii
Loan Estimate and the Closing Disclosure
The new regulations create two essential documents in the loan application: the Loan Estimate and the Closing Disclosure. The Loan Estimate must be provided to a mortgage loan applicant within three days of the lender’s receipt of your application. This document is three pages, and covers such items as loan terms (principal and interest, mortgage insurance, and escrows), projected payments under the loan, estimated costs at closing, loan costs, and calculating cash needed to close (this is a sampling of disclosed information, only). What you should keep in mind is that once the “consummation date” (formerly referred to as the mortgage commitment date) passes, any significant adjustments to the Loan Estimate will trigger a revised Loan Estimate, and must be provided to you no later than seven business days before the consummation date.
Lenders Will be Monitored by the Consumer Financial Protection Bureau
For this reason, the real estate contracts (and attorney review letters) will have to include language providing flexibility for revised “consummation” dates; whereas, previously, everyone was focused on commitment date deadlines. Flexibility is required in the agreements to account for the lender’s government compliance requirements, and particularly the disclosure periods. The penalties for non-compliance will be extremely harsh, as the lenders will be monitored by an aggressive watch dog, the Consumer Financial Protection Bureau.
The Borrower Must Receive Closing Disclosure No Less Than Three Business Days Prior to the Scheduled Closing
The second essential document on the financial-end of the real estate transaction is the Closing Disclosure. This document in appearance will be similar to the Loan Estimate. You, the borrower, must receive this document no less than three business days prior to the scheduled closing. This is a significant change in the real estate transaction. In the past, the HUD-1 was usually generated the day before or even the day of the closing. This situation often caused a last minute crush prior to or during the closing, and was often the time when the financial institutions, or their brokers, pressured borrowers into loan terms which were unsuitable and unclear. This is the primary reason for the Act and resulting regulations.
Revisions to the Closing Disclosure Will Trigger an Additional Three Day Review
It is extremely important to understand that any required revisions to the Closing Disclosure will require the lender to revise the document, and this event will trigger an additional three day review. This is the aspect of the regulations that will cause you, the consumer, and us, the practitioners, the most stress. Due to these disclosure requirements, we foresee that most closing deadlines will have be approximated. This new fact of life will make the logistics of closing and moving in or out of the home more complicated.
Buyer and Seller No Longer Have a Single Document on Which All the Closing-Related Dollars are Disclosed.
The further downside to the regulations is that the home Buyer and Seller may no longer have a single document on which all the closing-related dollars are disclosed. In contrast, the HUD-1 disclosed every dollar from every source involved in the closing: the loan, together with lender points and charges, the Seller’s loan pay-off(s), the realtors’ commissions, as well as adjustments for taxes, etc. (again, this is a limited list). In fact, the Seller is not supposed to see the Buyer’s Closing Disclosure for privacy reasons (not unlike the medical HIPPA requirements). The details of how the real estate servicers (attorneys, title companies and realtors) will address these issues, and what procedures will become the new normal, have yet to be worked-out.
Recognize that the Lending Process is Undergoing Significant Change
For now, however, it is important to recognize that the lending process is undergoing a significant change. This institution-wide change will likely delay a higher percentage of residential closings. For this reason you should be prepared and, as a Buyer, protected in the contract documents from delays caused by a combination of the mandatory disclosure dates and the lending institution workforce’s learning curve.
i The regulations are found in Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act and the Truth In Lending Act (78 FR 79730, Dec. 31, 2013).
ii Note that the new disclosure regulations do not apply to home equity lines of credit, reverse mortgages or mortgages secured by a mobile home or any dwelling not attached to real estate. Further, these regulations do not apply to lenders making fewer than five mortgages in a given year.
BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need legal advice, or a referral to a real estate attorney , please contact us to discuss the specifics of your transaction .
© KilcommonsLaw, P.C. 2015