New Disclosure Forms Alter Transactions
Major changes are coming to real estate transactions starting October 3rd, 2015*. Any transaction involving a mortgage will use the new disclosure forms created by the Consumer Financial Protection Bureau (“CFPB”). NAR has compiled information on this topic on nar.realtor, and so this article will briefly summarize the changes and then focus on how the changes will affect association form contracts.
The Truth-in-Lending Act/RESPA Integrated Disclosures (“TRID”) creates timing requirements for disclosures that lenders need to make to consumers. Not only will the new forms be used in transactions, the relationship between the lender and other parties like 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.
I. TRID Overview
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 August 1st, and cannot be used for transactions prior to that date.
TRID contains many intricate requirements for the disclosure forms and this article is merely an overview of these requirements. 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 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 7 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%; loan product changes; or a pre-payment penalty is added.
II. Association Purchase Contract Revisions
The new disclosure timing requirements needs to be addressed in the model form contracts that many REALTOR® associations create. All associations who create form contracts need to revisit the timelines established in these agreements, as the process for completing a real estate transaction will be altered starting on August 1st.
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. The association should work with lenders and closing agents in its area to help revise its contract, as those groups will be familiar with how the rule will be implemented and so will have insight into workable timelines for a transaction.
A few associations have already considered the changes that need to be made to their forms. Some have made changes to their forms by including language that contract will extend if the closing is delayed through no fault of either party. Others have found that their existing contract adequately covered the delay scenario, as the contracts already accounted for delays such as these. Finally, many associations have decided to take a wait-and-see approach before adapting their agreements, as they want to see how the new process works before adapting their contracts.
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.
III. 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 could cause a delay to the closing.
TRID disclosures will change the timing for transactions involving a mortgage. REALTOR® associations who create form contracts should review these contracts in light of these new requirements. Real estate professionals will need to help their clients understand how the changes will change the transaction, explaining how the transactions may take longer and that there exists the possibility for delays.
* Update 8/11/2015: Because of an administrative error in providing notice about the new changes, the CFPB has changed the effective date for the use of the TILA/RESPA Integrated Disclosure forms from August 1, 2015 to October 3, 2015.