Big Changes in Residential Real Estate Closings

Changes mandated by the CFPB spell the end of "Closings" and the advent of the "Consummation."

   The lending process for residential real estate closings is poised for dramatic changes later this year. For loan applications commenced after August 1, 2015, lenders will take applications, make disclosures, and communicate with borrowers under new rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act as implemented by the Consumer Financial Protection Bureau (CFPB).

   In this edition of A Legal Moment, I will cover the basics of the new Loan Estimate, the new Closing Disclosure, and the rules of delivery and timing for these forms – both of which will impact scheduling and re-scheduling of closings. Closings, by the way, are now called “consummations” under the law.
Loan Estimate
   The first big change is the replacement of the current Good Faith Estimate and initial Truth in Lending Disclosure with a new integrated document called the Loan Estimate. The purpose of this form is to disclose a good faith estimate of the terms and costs of the loan. Lenders must either hand deliver or mail the Loan Estimate to the borrower within three business days of the receipt of a borrower’s application. The day of the application does not count in determining the delivery deadline. For example, if a borrower applies for the loan on Monday, the lender must deliver or mail the Loan Estimate on or before the following Thursday.
   Delivery or mailing of the Loan Estimate begins a seven business day waiting period before the consummation can actually occur. Saturday counts as a business day for this measurement. In other words, if a lender delivers the Loan Estimate on Monday, October 1, consummation can occur no earlier than Tuesday, October 9.
   Revisions to Loan Estimates are very restricted. The most likely reasons to trigger a revised Loan Estimate are changes requested by the borrower, a borrower’s request to lock a previously unlocked interest rate which changes the disclosure, or the borrower’s indication of an intent to close more than ten business days after the original Loan Estimate.
   A revised Loan Estimate triggers new deadlines. If the lender revises the Loan Estimate, it must deliver or mail the revised Loan Estimate no later than three business days after receiving the information triggering the revision; if the the lender elects to mail the revised Loan Estimate, it must do so at least seven days prior to consummation. Regardless of how the revision is delivered, finally, the borrower must receive the revised Loan Estimate no later than four business days before consummation.
Closing Disclosure
   The second big change under the new rules replaces the current HUD-1 Settlement Statement and final Truth in Lending Disclosure with a new integrated Closing Disclosure. The purpose of this form is to disclose the actual terms and costs of the loan at the consummation. Lenders must ensure, and be able to prove, that borrowers receive this form no later than three business days before consummation. For this reason, most lenders are going to mail these forms by regular mail to take advantage of a legal presumption that mail arrives within three days of the date of mailing; in this way the lenders do not have to prove that borrowers actually received the form three business days after mailing. Taken together, these requirements mandate that the Closing Disclosure be completely prepared and mailed six business days before consummation. Some large banks, such as Bank of America and Wells Fargo, are going to prepare these forms themselves instead of closing attorneys.
   Certain changes in the Closing Disclosure potentially trigger a new three-day waiting period before consummation. These include changes in the loan’s annual percentage rate, changes in the loan product offered (e.g. from fixed rate to variable rate), or adding a prepayment penalty. The limited changes on this list indicate that re-disclosure will not happen very often. For any other change, the Closing Disclosure must be delivered before consummation, but there is no additional three-day waiting period.
   One other important fact about the new Closing Disclosure is that sellers are not allowed to see the form. Sellers will receive a separate seller-only disclosure.
   Because loan applications commenced prior to August 1, 2015, will still close under the current system, there will be a period of time where closings will occur under two different rules.
   As you have no doubt noted, there are going to be some new very specific time requirements that will affect closings. I have prepared a simple table reflecting those requirements.