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 procedures.
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. An application 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 delays."
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 effect.