Residential Real Estate Closings
Changes Are Coming
Beginning August 1, 2015*, creditors and settlement agents will have new disclosure forms to provide consumers, under a federal law mandating a revision of existing forms. For those of you familiar with the current system, the existing Truth in Lending Act (“TILA”) and Real Estate Settlement Procedures Act (“RESPA”) each have required creditors and settlement agents to provide certain forms to consumers before or at closing. You know these forms as the RESPA Good Faith Estimate, Initial Truth-in-Lending Disclosure, HUD-1, and Final Truth-in-Lending Disclosure. The information on these forms was redundant, the language often inconsistent, and consumers had trouble understanding them. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the Consumer Financial Protection Bureau to streamline the information on these forms. The end result of this streamlining is essentially that the previous RESPA Good Faith Estimate and Initial TIL forms have been combined into the “Loan Estimate,” and the HUD-1 and Final TIL have been combined into the “Closing Disclosure.” This is known as the “TILA-RESPA” rule.
On the Loan Estimate, the creditor provides estimates of the transaction’s costs and terms. If you are a creditor, then you must deliver this form to the consumer, or put it in the mail, within three business days of receiving the loan application and no later than seven business days before closing. The creditor must make a good faith estimate of the costs and terms on the form, making the disclosure based on the best information available for any unknown items. If certain information is merely an estimate, you should designate it as such. The good faith requirement generally means that the cost imposed on the consumer should not exceed the amount shown on the Loan Estimate.
Creditors should be careful in filling the Loan Estimate out, because once issued, it cannot be reissued because of technical errors, miscalculations, or underestimations. The Loan Estimate can only be changed when there are changed circumstances, listed as:
- when settlement charges increase more than is permitted under TILA-RESPA (10%);
- when the consumer’s creditworthiness or the value of the security for the loan changes;
- when the consumer requests revisions to the credit terms; when locking an unlocked interest rate causes the points or lender credits to change;
- when the consumer indicates an intent to proceed more than ten business days after the Loan Estimate was provided; and
- when, for a new construction loan, settlement is delayed more than sixty calendar days.
This form reflects the actual terms of the closing. A large different in this new system is that the consumer must receive this at least three business days before closing, either via hand delivery, mail, or email. Note, if you choose to mail the Closing Disclosure, the Mailbox Rule assumes it arrives three business days after being placed in the mail. This three business day waiting period cannot be waived, unless the consumer can demonstrate a bona fide financial emergency.
In preparing the Closing Disclosure, similar to the Loan Estimate, if certain terms are not known to the creditor, the creditor may estimate disclosures based upon good faith and due diligence in searching for that information. If there are such estimates, corrected disclosures containing actual terms of the transaction must be provided at or before the closing. In certain circumstances, issuing such a corrected disclosure will re-trigger the three business day waiting period before closing. These occur when: there are changes to the loan’s APR; changes to the loan product; or the addition of a prepayment penalty. Any other changes do not reset the three (3) business day waiting period.
At Brotschul Potts, we realize these changes take getting used to, and many of you may have concerns about the new process. We are standing by to answer any of your questions and look forward to working with you.
*N.B. One June 24, the Consumer Financial Protection Bureau issued a proposed amendment to the rule, moving to change the effective date to October 3, 2015. This proposal is open for public comment until July 7.