Real estate Closing Changes
Arguably the most significant changes in residential real estate transactions in 40 years are now occurring.
The federal Dodd-Frank Act created the Consumer Financial Protection Bureau in 2011, in the midst of and to a large extent in reaction to the residential mortgage crisis then sweeping the nation. Concerned that residential mortgage lenders were not being sufficiently transparent with borrowers and that significant lender’s charges were not being disclosed until the closing, the CFPB developed new forms and procedures that are now effective for residential mortgage loan transactions for which applications were made on and after October 3, 2015.
Residential mortgage loans that are subject to the new rules include typical residential mortgage loans, refinances of residential real estate, loans on residential real estate involving 25 acres or less, vacant land transactions, and transactions involving residential construction and residential time shares.
Certain loans, however, are not subject to the new rules – home equity lines of credit (which, surprisingly to many borrowers, usually involve a second mortgage on the real estate), reverse mortgages, mortgages secured by a mobile home, no-interest second mortgages made for down payment assistance and loans made by a creditor who does not make more than four mortgage loans per year. Cash transactions not involving financing are also excluded.
For several decades, residential mortgage lenders have been required to provide the borrowers with a Good Faith Estimate. This form has now been replaced with a new Loan Estimate. As soon as a mortgage lender receives a complete loan application for a residential mortgage, the lender has three days to send the borrower a five-page Loan Estimate.
Because a loan application is not deemed complete for these purposes unless it includes the address and price of the property to be purchased, lenders should be able to issue a pre-approval letter without being required to send the Loan Estimate within three days.
For covered transactions, the standard HUD-1 Settlement Statement that has been used for over 40 years is being replaced by a two-page Closing Disclosure, a three-page ALTA Settlement Statement – Borrower/Buyer and a three-page ALTA Settlement Statement – Seller. The requirement for separate buyer and seller statements is designed primarily to preserve the confidentiality of the buyer’s financing terms.
The new rules likely will extend the time between when a sales contract is signed and the closing date. The new Closing Disclosure must be delivered to the consumer at least three days before the closing (excluding Sundays and federal holidays). The lender is then locked in to the charges listed on that Closing Disclosure and cannot change those at the closing.
If the Closing Disclosure is mailed, it will be considered received by the borrower three days after mailing, meaning that if the Closing Disclosure is mailed on a Monday, it will be considered received by the borrower on Thursday. The three-day waiting period then begins, so the earliest the closing can occur will be the following Monday.
Perhaps the most significant change will be in actually scheduling closings. Experts in the industry are advising real estate brokers and attorneys that, when contracts are prepared, the closing date should be at least 60 days after the date of the contract to enable the new procedures to occur.
Another change will be in dealing with last-minute events that change closing numbers. For example, buyers often conduct a final walk-through of the property just before closing, and if an issue with the condition of the property arises during the walk-through, it is usually resolved with a credit to the buyer or other adjustment at the time of closing. Depending on a number of factors, this could result in a delay of the closing for a week or so.
This possibility is especially problematic for closings that are part of a chain of closings among parties that are simultaneously buying and selling residences. While attorneys in the past usually recommended that buyers not take possession before a closing or that sellers not retain possession after a closing, the possibility of closing delays likely will require more flexibility in these instances. Provisions for pre- or post-closing possession might now need to be developed to deal with homeowner’s insurance, security deposits and utilities.
While the new changes have received considerable hype and are causing anxiety among real estate brokers, mortgage lenders, attorneys, buyers and sellers, the actual results may be much less disruptive. As typically is the case, time will be the judge.