By Jeffrey T. Baker, IAR Transaction Helpline Attorney, Sorling Northrup Attorneys
(Editor's Note: After press time, the Consumer Financial Protection Bureau announced it was delaying the implementation deadline of the new rules from Aug. 1 to Oct. 3, 2015.)
Beginning Oct. 3, 2015, the rules governing disclosures by creditors in real estate transactions are changing. While this date is rapidly approaching, there are still many unanswered questions as to how exactly the new rules will be implemented. Here, we take you through what is known and what is not known about the newly created Integrated Disclosure rules and show you how the new rules may significantly impact real estate transactions in Illinois.
For decades, lenders have been subject to the disclosure requirements contained in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA). Under TILA, creditors were required to provide borrowers with the Good Faith Estimate and the initial Truth-in-Lending disclosure when an application for a loan was made. RESPA, on the other hand, required lenders to provide the HUD-1 and the final Truth-in-Lending disclosure at or near closing.
At the height of the economic crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which among other things, directed the newly created Consumer Financial Protection Bureau (CFPB) to integrate the two sets of disclosures required by TILA and RESPA. The result of the CFPB’s efforts was what is now referred to as Regulation X (which is over 1,800 pages long) and which combines all of the previous disclosure requirements into two new documents – the Loan Estimate and the Closing Disclosure.
The Loan Estimate combines the Good Faith Estimate and initial Truth-in-Lending disclosure with the intent of providing consumers a clearer picture of the costs, features, and risks of the mortgage loan they’re applying for.
One of the biggest changes for lenders under the new rules are the strict timelines that are established for delivery of the new documents. The Loan Estimate, for instance, must be delivered to the consumer within three business days of the lender’s receipt of the consumer’s application. For the Loan Estimate, “business days” includes Saturdays if the lender is open for business on Saturdays. Further, the Loan Estimate cannot be provided any later than the seventh business day prior to consummation of the transaction. If a mortgage broker is involved, they may prepare and deliver the Loan Estimate on behalf of a creditor, but it’s ultimately the creditor that is liable for any errors or omissions on the document.
Exactly when a lender receives a loan application depends on the information that is provided by the consumer. A consumer is considered to have made an application when they have provided a lender with only six key pieces of information, including: their name, income, social security number, the address of the property, an estimated value of the property to be purchased, and the amount of the mortgage loan that is being sought. Even if the creditor requires further information from the borrower in order to determine credit-worthiness, once these six pieces of information have been provided, the creditor is obligated to provide the Loan Estimate within three business days, unless the creditor chooses to deny the application.
The new rules do not prevent lenders from creating systems that limit some of the information provided by consumers such that the “three business day” requirement is not triggered. For instance, pre-approval and qualification letters are still allowed, however, they must now contain the following, explicit language in 12-point font: “Your actual rate, payment and costs could be higher. Get an official Loan Estimate before choosing a loan.”
The Loan Estimate document expires ten days after it is delivered to the consumer. In other words, if the consumer does not indicate to the bank that they intend to choose the loan within the 10-day period, the creditor will need to issue a new or revised Loan Estimate – which, of course, comes with a whole new set of timeline requirements.
The purpose of the Loan Estimate is to provide consumers with the best possible prediction of what the true costs of the loan will be. Therefore, banks are required to use good faith and exercise due diligence to obtain the information that is provided on the disclosure document – this includes real estate commissions and other predictable fees. In general, the test for whether an estimate has been made in good faith is simply whether the amount paid at closing is more or less than the estimate contained on the Loan Estimate document. If a consumer is required to pay more at closing, then it is presumed that the estimate was not in good faith.
However, the CFPB recognized that there are some settlement costs that can vary depending on the transaction. Thus, to better determine whether the lender has acted in good faith, the CFPB created three categories of costs, each with its own rule or “tolerance” for determining whether the estimates are in good faith. In addition to the creation of the three categories of costs, lenders now must also provide consumers with a written list of services and providers for which the borrower is entitled to shop. This list must be provided in the same amount of time as the Loan Estimate and must identify at least one available settlement service provider for each service and also clearly state that the consumer is not required to choose from those providers on the list.
The first category of costs created provides for a 10 percent cumulative tolerance between the amount estimated on the Loan Estimate and the amount actually paid by the consumer. Charges that fall within this category include recording fees and charges for third party services where the service provider is not the creditor or an affiliate and where the consumer is entitled to shop for the service and chooses from the creditor’s written list of service providers.
The second category provides for zero tolerance between the amount estimated and the amount actually paid for by the consumer. In other words, there can be no difference between the Loan Estimate amount and the amount that the consumer actually paid without a violation. These charges include fees paid to the creditor, mortgage broker, or an affiliate of either. These costs also include fees to unaffiliated third parties if the consumer was not entitled to shop for the service that was charged for, as well as transfer taxes.
Finally, the third category includes costs for which there is no tolerance limitation. These charges include prepaid interest, insurance premiums, and those services where consumers are entitled to shop for the provider and the consumer chooses not to use a provider on the creditor’s list of service providers, or services that are not required by the creditor at all.
The most obvious result of this new disclosure scheme is to insure the disclosures at the time of the loan application are as close as possible to the actual amount that will be charged to the consumer at closing.
In order to change or revise the Loan Estimate, there must be a change of circumstances that qualifies according to the new rules. Qualifying circumstances are extremely limited but do include events that are beyond the control of any of the parties and changes to a borrower’s eligibility or ability to qualify, such as the loss of a job.
For those transactions that proceed to closing, the lender must now provide the new Closing Disclosure document to the consumer. The Closing Disclosure combines the HUD-1 and the final Truth-in-Lending disclosure into one document and is designed to provide the consumer with a detailed explanation of all of the costs and charges associated with the transaction.
Lenders are required to provide the Closing Disclosure form no later than three business days before consummation of the loan. Interestingly, “business day” in the context of the Closing Disclosure is defined differently than with the Loan Estimate. In the case of the Closing Disclosure, “business day” always includes Saturday, regardless of whether the lender is actually open on that day.
Most brokers will notice immediately that the Closing Disclosure document differs greatly in appearance from the more recognizable HUD-1, however, the document is designed to be more easily understood by consumers. Among the document’s key features are an entire page devoted to an explanation and statement of all of the mortgage loan terms and more importantly the costs or cash required to close. The second page of the Closing Disclosure then breaks down the closing costs and allocates them by the party responsible for paying them.
Brokers will also notice that the new Closing Disclosure document contains a column to show when certain costs are paid for by third parties, however, the new rules do not require that these be shown. In other words, unlike with the current HUD-1, the new Closing Disclosure does not require those costs covered by the seller’s or buyer’s broker to be disclosed.
Unlike the Loan Estimate, which must be delivered (in person or simply put in the mail) within three business days of the loan application, the Closing Disclosure must actually be received by the consumer no later than three business days prior to the consummation of the loan. A lender or mortgage broker may deliver the Closing Disclosure form in person, by mail, or by email. However, absent evidence to the contrary, if the form is mailed or emailed, it is presumed to be received three business days after the date it was mailed or emailed.
Certain changes to information contained on the Closing Disclosure may require restarting the three business day requirement. Changes to the APR, the loan product (i.e., switching between an ARM and a fixed rate product), or the addition of a pre-payment penalty, all require a new Closing Disclosure and a new three business day period before the consummation may occur. If other information on the Closing Disclosure requires changes, it is recommended that a new form be produced and delivered to the consumer one business day prior to the consummation.
Finally, the Closing Disclosure is the ultimate document that is used to determine whether the estimates contained on the Loan Estimate form were made in good faith. If one of the estimates falls outside the tolerance limit for its category, the lender must refund the excess amount charged to the consumer and reissue a new Closing Disclosure document reflecting the refund within 60 calendar days after consummation.
While the Integrated Disclosure rule’s changes appear to be primarily aimed at lenders and settlement service providers, the practical impact is sure to be felt throughout the entirety of a real estate transaction, including the work that brokers do in Illinois.
There are many unanswered questions about how exactly the new rules will impact various parts of a transaction but there are several areas where conclusions can already be drawn. One of the first, most obvious impacts the new rule will have is to prolong the amount of time required to close a transaction. Mistakes on the Loan Estimate or the Closing Disclosure significantly impair lenders’ ability to sell their loans on the secondary market. Thus, extra care will be afforded to insure that mistakes are corrected before consummation and that means closings will likely be delayed more often. Furthermore, remember that consumers have 10 days to decide whether to move forward after receiving their Loan Estimate. Because lenders cannot charge consumers for most costs prior to their acceptance, this also could cause substantial delays.
According to most commentators, it is recommended that brokers work with their clients to complete all necessary work and documentation no later than seven days prior to the proposed closing so that enough time has been set aside to deal with changes that may be necessary to the Closing Disclosure form.
Because of delayed closings, it is also projected that there will be fewer closings per day and the costs charged by settlement providers will likely increase to accommodate the changes.
Given this, however, as with any new important regulations, the exact impact these changes will have cannot be seen until they are fully implemented. Even then, some new regulations require legal challenges before there is proper authority for the correct implementation. Further complicating matters is the CFPB’s indication that they may not immediately enforce the new rules if the parties involved can show a focused, good-faith effort to be in compliance with the rules. However, without further guidance from the agency, it’s still unclear how this “enforcement grace period” would actually work.
In the context of Illinois transactions, it remains to be seen how financing contingency language will need to change to accommodate the new practices implemented by lenders. For instance in those areas where attorney review is included in the form real estate contract, it is possible that multiple Loan Estimates will be required in response to changes made to the underlying deal between the buyer and seller.
It is safe to say that after Oct. 3 the procedure for closing a real estate transaction is going to look completely different than it does now. While there is still much to be determined, in order to avoid costly delays or upset clients, it is best if everyone, including brokers, begin familiarizing themselves with the new rules and procedures as soon as possible.
There are a number of webinars and resources available to help you learn more about the upcoming TILA-RESPA Integrated Disclosures (TRID) changes.
Webinar: IAR Legal Webinar: Are You Ready?
On June 25, IAR Legal Services will discuss what Illinois REALTORS® need to know about the new rules during a one-hour webinar for IAR members. A recording of the webinar will be available afterward for download at www.illinoisrealtor.org/legal/webinars
. Reminder: IAR Legal Webinars are a members-only benefit so you will need to log in to access the recording.
Webinar: TRID-RESPA: A Comprehensive Overview with Leonard Bernstein
On May 4, IAR and the Illinois Bankers Association offered a webinar on how the integration of TILA and RESPA will affect the real estate and lending industries. Leonard A. Bernstein, Managing Partner of Reed Smith, LLP, in Philadelphia, led the webinar. Find a recording of the webinar and a PowerPoint presentation at www.illinoisrealtor.org/legal
Video: Window to the Law: TRID Changes Coming