May 13th, 2015 10:27 AM by Jackie A. Graves
Loan Disclosures and Closing Statements will Look Different
August 1, 2015 is the date that the Good Faith Estimate (GFE),
the HUD-1 closing statement, and the Truth-in-Lending Act (TILA) disclosures
will be replaced in most transactions by two new forms -- the Loan Estimate and
the Closing Disclosure. While this change may not directly affect the way most
real estate agents do business, it is certainly something they will need to
become familiar with. They will also want to understand that their affiliate
friends in the lending, title, and escrow business may be feeling more than
just a touch of pressure as they work to become familiar with the new forms and
The legal department of the California Association of REALTORS® (CAR) has
recently published a question-and-answer memorandum (Loan Estimate and Closing Disclosure Forms) that explains many of the changes. It points out that the
changes are a result of Dodd-Frank legislation that directed the Consumer
Financial Protection Bureau (CFPB) to create rules, regulations, and forms that
"are designed to aid the consumer in comparison shopping, improve consumer
understanding, and prevent surprises at the closing table." Whether or not
these changes will actually have that effect is something we'll just have to
wait to see.
The new forms will be required in most transactions involving
financing. They will not, though, be required in those involving HELOCs (Home
Equity Lines of Credit), reverse mortgages, or mobile home financing. Those
will still use the forms used now.
The Loan Estimate replaces the current Good Faith Estimate and
the initial Truth-in-Lending forms. It combines an estimate of loan costs and
terms, along with various disclosures relating to the loan terms. The lender
must deliver or place in the mail the Loan Estimate no later than the third day
after receiving the consumer's application. Anapplication means the submission by the borrower of six pieces of
information: name, income, social security number, address of the property,
estimate of the value of the property, and the amount of loan sought.
One of the causes of consumer (and agent) complaints that the
CFPB is seeking to eliminate is the frequent discrepancy between Good Faith
Estimates and the actual costs at closing. Thus, the regulation holds the
lender strictly to the estimates of some of the types of costs, but not all.
There are three categories:
1. "Zero tolerance" In this category the lender is held strictly to the cost in the
loan estimates. These include fees paid to the lender or mortgage broker, or an
affiliate of either. Any cost in this category that is over the amount stated
in the Loan Estimate must be refunded to the borrower.
2. "10% tolerance" These include recording fees and charges for third-party
services where the charge is not paid to the lender or the lender's affiliate.
All these costs are added together. If the total exceeds 10% of the Loan
Estimate, the difference must be refunded to the borrower.
3. "No tolerance" These are estimates for such things as property insurance
premiums and impound accounts. They are not within the control of the lender,
and the lender is not charged if the estimate is inaccurate.
The Closing Disclosure replaces the HUD-1 and the final
Truth-in-lending disclosures. The borrower must receive the Closing Disclosure
no later than three business days before consummation. Consummation is
not the same as closing. Nor is it funding. As the CAR memo puts it, "Consummation occurs when the consumer becomes
contractually obligated to the creditor on the loan (as determined by State
law)…" In California, for
example, consummation occurs when the borrower signs the loan documents.
Suppose, for example, that closing is scheduled to occur on
Wednesday, and that the lender -- as is not uncommon -- will not fund until at
least 24 hours after loan documents are signed. Loan documents might be signed
late Monday afternoon. Funding occurs late Tuesday afternoon, but too late for
recording. Recording (closing) then occurs Wednesday morning. When was
consummation? In California, it was Monday. So when was the Closing Disclosure
due? Thursday the week before. Sunday didn't count, because it is three business days.
Any changes to the Closing Disclosure rendering it inaccurate
will require an updated Closing Disclosure. Suppose, using the example above,
that a buyer "walk through" on Friday resulted in a $500 credit being
given to the buyer because of some inadequate or undone repair. That would call
for the Closing Disclosure to be updated.
The CAR memo states that "Normally a change in the Closing
Disclosure will not require any extra time." However, if a material change
were to be made to the loan itself -- such as a change in the loan's APR --
that would also require a reset of the three business day period. Also, the
memo warns, "…the lenders [sic] own procedures under the new rules may be cumbersome and cause
Settlement agents, escrows, and lenders will all get used to the
new forms and procedures. But it is reasonable to expect some glitches along
the way. Agents should be prepared for some delays as the new rules take
Bob Hunt is a director of the California Association of Realtors®.
He is the author of Real Estate the Ethical Way.
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