Questions about the Simplification to Real Estate Closing Documentation to be Implemented Nationally on October 3, 2015
Efforts to simplify closing documentation have many kinks. As regulation and enforcement of mortgage loan closings shifts from HUD to the Consumer Protection Finance Bureau (CPFB), real estate and loan closers face new rules that are arguably designed to provide more information to borrowers. Anyone who has been involved in residential closings knows that lenders are notorious for changing closing figures at the last minute. Hopefully, these new rules will have the effect of causing lenders to be more careful, as well as being more expeditious in preparing closing packages. However, industry groups such as the National Association of Realtors and the National Association of Home Builders are urging Congress and the CFPB to provide for a grace period for enforcement of these new rules in order to give the industry time to perfect performance. On June 3, 2015, the CFPB finally announced that enforcement of the disclosure rules will be delayed for an undefined period of time. And, the CFPB will be “sensitive in its oversight and enforcement” to good faith efforts to compliance. The new rules were scheduled to go into effect on August 1, 2015 and in late June, the CFPB announced the implantation date would be extended until October 3.
Here is a summary of the new rules:
- The Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) reforms are to be implemented on October 3, 2015.
- Among these reforms are the elimination of Good Faith Estimates (GFEs) and Truth in Lending Disclosures that Lenders must provide to Borrowers at loan application and closing.
- These 2 forms will be replaced by a single Loan Estimate. The Loan Estimate is to be provided at the time of loan application and a Closing Disclosure, which is essentially an update of the Loan Estimate, must be provided at least 3 business days prior to Loan Closing. Therefore, the Lender sets the closing date based on when the Closing Disclosure is provided, notwithstanding what a Purchase and Sale Agreement might provide. A three day waiting period is created.
- If there is any change to the information on the Closing Disclosure, the 3 day waiting period will start over.
Many industry experts believe that there will be a back log of closings created by the implementation of the rules. Lenders will be more cautious as they will be liable for the difference if their estimates are short of the actual costs of closing. In addition, while lenders would prefer that title companies share in this burden, asking title companies to assist in the preparation of the disclosure forms, title companies likely will decline to undertake this task and assume any liability since the numbers come solely from the Lenders.
Another potential cause of closing slowdown will be that every time closing figures change, a new Closing Disclosure will need to be prepared and the 3 day window starts again. Lenders will be forced to get it right the first time. Closing agents should be reluctant, however, to do any “off Closing Disclosure” disbursements to expedite closings. Once enforcement mechanisms are put in place, given the rationale for the new rules, any deviation from the rules and procedures is likely to be treated as mortgage fraud.
Finally, the days of simultaneous closings of the sale of one residence and the purchase of the new residence when 2 new mortgages are involved are likely over. It will be virtually impossible for 2 different lenders to coordinate and agree on a closing date and generate the required disclosures in a timely fashion. Homeowners selling one home and needing the cash in order to close on their new home should make appropriate arrangements for the inevitable gap between the closings.