The big topic amongst residential real estate professionals these days is of course the impact the new CFPB regulations will have on the industry when they are finally implemented on October 3, 2015. The Consumer Financial Protection Bureau (the “CFPB”) was created by the Dodd-Frank Act passed by Congress as a response to the 2008 financial crisis. The goal of the regulations is a noble one- to give consumers as much information as possible in an understandable format before making a financial decision, and has thus been nicknamed by this federal agency as the “Know Before You Owe” mortgage rules.
The change that is easiest to get a handle on is the new terminology that will be used for the mortgage documents and players. The purchaser/borrower (now referred to as the “consumer”) must receive a “Loan Estimate” from the lender (now referred to as the “creditor”) within three business days after the creditor’s receipt of the consumer’s loan application. The Loan Estimate combines the previously required Good Faith Estimate and initial Truth-in-Lending Disclosures into one document in order to give consumers an accurate picture of their mortgage loan. Then, the consumer must receive a “Closing Disclosure” from the creditor no later than three business days before the closing (now referred to as the “Consummation”). The Closing Disclosure combines the previously required HUD-1 and final Trust-in-Lending Disclosure into one document to provide consumers with a final amount required to close and to determine if the Loan Estimate was made in good faith.
The upcoming change that has caused the most consternation and uncertainty is the three-business day rule with respect to the Closing Disclosure. If the goal is for the consumer “to know before she owes”, it would be nice of course for the consumer to actually receive the closing figures sometime earlier than ten minutes before closing. So the centerpiece of the CFPB regulations is that the final closing figures, or Closing Disclosure, must be received by the consumer no later than three business days prior to closing. If the creditor cannot provide satisfactory evidence of receipt by the consumer, then the Closing Disclosure is deemed received three business days after the date it was sent by the creditor. So the practical implication is that there may be instances where the closing does not occur until six business days after the date the creditor sent the Closing Disclosure.
To avoid this six-business day waiting period, I expect the mortgage industry to have protocols in place so that the lender can immediately verify email receipt of the Closing Disclosure. Nonetheless, it will now be the real estate attorney’s responsibility to insure that his buyer client is not held in default if the closing is delayed by this waiting period. What that means is that most all residential real estate transactions will be subject to a mortgage contingency right up to the week of the closing. The parties will have to deal with this uncertainty as they schedule their moving trucks, and attempt to juggle their buy/sell transactions. That being said, we must acknowledge that the lender’s preparedness for closing is certainly not a new problem. It seems like a distant memory that the parties could reasonably expect a buyer to secure a mortgage commitment several weeks in advance of closing. Rather, the norm in recent years is that the buyer’s attorney is inevitably forced to extend the mortgage contingency- often up until the eve of closing as the lender does not have a “clear to close.”
However, I do believe a very real change will be that buyers will have significantly more interaction with their attorneys in the days leading up to the closing. I imagine that buyers, and especially first-time home buyers, will have a lot of questions for their attorney regarding the Closing Disclosure when they receive it several days before the closing. Further, and if indeed the closing figures are explained to the buyer in advance of closing, and if we can assume that the figures cannot change at the closing table, maybe we can hope that the actual length of closing will be reduced.
Another key component to the rule is that if certain figures are adjusted within the three-day review period, it may trigger another re-disclosure, which could delay the closing an additional period of days. Many commentators have expressed concern that if any problems or issues arise at the final walk through/inspection of the property, it will delay the closing. The concern is that any last minute negotiated repair credit due to problems with the walk through will trigger a re-disclosure. However CFPB’s own website explains that certain changes in closing figures will not require a new Closing Disclosure, such as “unexpected discoveries on a walk-through such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer.”
While this broken refrigerator example given by the CFPB is helpful, what if there is a more significant monetary credit negotiated at the walk through? The CFPB regulations are still vague on this point. That being said, even under current lending guidelines, it is often a major problem when the parties try and get last minute lender approval for a repair credit, commonly known as a “closing cost” credit. Based on this current reality, I believe it is a best practice for the buyer’s attorney to demand that seller provide invoices well in advance of closing for any repairs it agreed to undertake during attorney review. Further, if the nature of the repair necessitates an inspection, then they buyer should complete that inspection on a date earlier than the final walk through. That way, if there is a continued dispute or issue regarding the repair, the seller still has time to address it, or the parties can negotiate a credit in time for the lender’s blessing.
Once the CFPB regulations go into effect on October 3, 2015, the impact it will have on mortgage lenders and title companies cannot be understated. Title companies may initially struggle as they begin implementing brand new systems and software to incorporate the new forms. Mortgage lenders will inevitably rely on title companies earlier in the process, as they try to finalize the Closing Disclosure several days in advance of the closing date. But it is important to note that the regulations do not automatically apply to all closings after October 3. Rather, the critical date is the date the mortgage application is processed. As such, the actual parties to the transaction, and their attorneys, will not likely feel the impact of the regulations until many of these closings get scheduled later in the year. As such, we should all be prepared for some rocky transactions right around the Thanksgiving holiday. But maybe as we approach the new year, the industry as a whole will begin to get a handle on this new way of doing business.