By Robert M. Steeg
Residential real estate closings will never be the same.
The following article from The New York Times, “New Disclosure Rules for Mortgages,” only begins to touch upon the sweeping changes for residential real estate that took effect on October 3, 2015. The entirely new set of rules will affect lenders, lawyers, buyers and title companies involved in sales of single family homes.
Under the umbrella of the Consumer Financial Protection Bureau, the federal government is trying to achieve a greater level of transparency and consumer protection for home-buyers, in response to the abuses in residential lending that contributed to the Great Recession of 2008-09.
As even this article points out, however, there are drawbacks as well as benefits. The drawbacks include more paperwork, complexity, time, and (perhaps) costs. There are also unintended complications that will have to be addressed as the new rules are applied in practice.
BUYERS AND RESIDENTIAL REAL ESTATE AGENTS TAKE NOTE
Here’s one example of which buyers and real estate agents need to be aware.
If there is a last minute change in the financial structure of the deal, then new paperwork is needed, and a mandatory additional time period of 3-6 days is required (for new consumer information disclosures) before the deal may close.
What happens if the new elements are introduced 2 days before the last day for the closing under the contract? Unless the purchase agreement so provides, the seller does not have to grant an extension of time to the buyer under the purchase agreement, but the buyer cannot get his financing without waiting for the mandatory additional time period to expire. The seller could have the buyer over a barrel—especially if the seller has a back-up offer for a lot more money.
Over time, we would expect that a standard provision will be introduced, to require an extension of time under these circumstances, and thus to accommodate this unintended consequence of the new regulations.
BEST PRACTICES FOR THE NEW RULES
There are various processes whereby closing lawyers and title agencies are being evaluated for their company’s practices under the new rules, usually conducted through the American Land Title Association (ALTA). In fact, some lenders are requiring closing attorneys and title agencies to provide evidence of their compliance with the Best Practices established by ALTA, including asking specifically for a copy of the results of the company’s assessment.
There are two levels of compliance. The highest level results in a lawyer or title agency being “certified” to be using best practices to achieve compliance with the new rules. A less-stringent level of review leads to a lawyer or title agency having been “reviewed” with respect to its practices, but not “certified” to be using best practices.
Steeg Law and its affiliated title agency, Orleans Title Insurance Agency, are in the final stages of this process, and hope to be “certified” for best practices in the near future.
WHAT ARE THE NEW RULES?
Here is a very brief introduction to the overall situation, courtesy of The New York Times. If you have any further questions, please don’t hesitate to contact us.
New Disclosure Rules for Mortgages
By Lisa Prevost, September 25, 2015
Home loan offers should be easier to decipher come Oct. 3, when mortgage lenders must begin using new consumer disclosure forms that explicitly break down the costs and terms associated with a loan.
Instead of receiving four different disclosures in various formats, as currently required under the Truth in Lending and Real Estate Settlement Procedures Acts, borrowers will receive just two. Intended to make the loan process more transparent, the new forms, created by the Consumer Financial Protection Bureau, look similar and are much easier to understand.
They are just one aspect of regulatory changes dictating how the real estate and lending industries must handle disclosures. Lenders have been gearing up for the rule change for more than a year. For borrowers, the shift will be much simpler.
According to the new rules, disclosures must be delivered on a timely schedule. The initial Loan Estimate must be provided to borrowers no later than the third business day after they submit a loan application.
Its first page shows the loan amount and interest rate, what the borrower’s monthly payment would be, estimated taxes and insurance, and how much cash is required to close.
The Closing Disclosure, outlining the final transaction, must be provided to borrowers at least three business days before the closing date. This is a major change, as borrowers typically don’t see the closing documents until they are ready to sign.
In remarks to the National Association of Realtors earlier this month, Richard Cordray, the director of the Consumer Financial Protection Bureau, said the three-day window was intended to give borrowers time to compare the Closing Disclosure with the Loan Estimate and ensure the terms are the same.
“Our form makes that comparison very obvious, which minimizes the potential for nasty surprises such as bait-and-switch increases in rates, fees or settlement costs,” Mr. Cordray said.
Borrowers should be aware that under the new rules, if they decide to change loan products at the last minute — for example, switch from a fixed to an adjustable-rate loan — the closing date must be extended by an additional three days to allow for review of a new Closing Disclosure. Borrowers may not waive that three-day window.
To avoid such a delay, borrowers should make an informed decision early on about which product is going to work best for them, said Diane Evans, the president of the American Land Title Association, which represents the title insurance industry.
Borrowers might also ask their real estate agents or lawyers for advice on which lenders are best equipped to handle the regulatory shift, said Tammy Felenstein, the executive director of sales for Halstead Property in Stamford, Conn. “There’s going to be a little bit of a learning curve in the beginning,” she said. “Go with a lending institution that has prepared for these changes and knows what they’re doing.”
Consumers should be prepared for longer closing times as the industry adjusts to the new process. Under the rules, lenders, title companies, real estate agents and insurance representatives will have to come together much sooner in the process to get disclosures out in time. This could lengthen closing times over the next few months as they all adapt, Ms. Evans said.
Borrowers can help things along by getting their documents in quickly and scheduling inspections early on.
Some real estate agents are planning to write contracts with 45-day closings, instead of 30, Ms. Evans said, adding, “if you’re prepared for a little more time and it takes less, everybody leaves a little happier.”