For Loans Originated on or after August 1st, 2015, lenders must provide the borrower with the newly adopted Loan Estimate within three business days of taking application, and the Closing Disclosure three business days prior to settlement. While this may appear to be a small change to the settlement procedure, it brings with it some potentially deal breaking consequences if all parties are not properly prepared to meet the time constraints and adhere to the cost tolerances. That being said, I think the new disclosure documents are a vast improvement over the disclosures we use today, especially when it comes to unambiguously defining the terms of the deal. The comparison prepared by Consumer Financial Protection Bureau (CFPB) in the link below does a good job of showing what will change.
This has all come about as a result of the Dodd-Frank…Act which has directed the CFPB to combine and simplify the TILA and RESPA requirements into an Integrated Disclosure Rule, combined to create the latest acronym the TRID Rule or the Integrated Mortgage Disclosure Rule. The concerns come with the policies that are being adopted by the lenders, who will be held financially liable for failure to comply with new timing requirements and cost tolerances. One such timing requirement is that the final Closing Disclosure be mailed seven days prior to closing. The Consumer Financial Protection Bureau has set strict fines for any failure to allow the borrower three days to review the Closing Disclosure, and in order to ensure that lenders fulfill that requirement they have set a three business day threshold (if being mailed) for presumed receipt of the documents. As for cost tolerances, the final Closing Disclosure must be within defined tolerances from the Loan Estimate provided to the borrower previously, deviations result in restarting of the three business day notice for review along with any additional days to presume delivery.
Here are some things that will help you to avoid problems with your closing:
- Plan for your settlement to occur 30 to 45 days from ratification of the contract (industry leaders are encouraging borrowers to plan for 60 days to account for unforeseen delays they expect will plague closings during the transition). The less time you allow the more important it is that you consider using a local lender and comply with their requests for documentation or information as quickly as possible.
- Back to Back or Coinciding settlements have an increased likelihood of delay (which could cause contracts to fall out per the financing clause) due to the increased number of variables involved.
- Get a 45 to 60 day rate lock on your loan. Sellers should consider requiring this from non cash buyers. An expired lock could result in a borrower being unable to qualify due to a change in interest rate and allow them to get out of the contract on the financing clause.
- Make no major changes to your financial landscape from the time of application to the time of closing and be upfront with your lender. Late discoveries of financial circumstances could delay or terminate the purchase.
- Determine what subsidies will be needed from the seller or agents as a consequence of home inspection items or walk through well before the seven day notice cut off to allow time for changes to the Closing Disclosure to be made.
- Ask your lender what they have done to comply with the TRID Rule. If they don’t know what your talking about, move on.
P.S. With these changes to the processes and procedures there are new titles that the CFPB is trying to implement. In the interest of informing you about the changes to the procedures with minimal confusion I used the terms you are already familiar with above. These are the new titles you may see in your future transactions: The Lender is now the Creditor. The Buyer/Borrower is now the Consumer. The Settlement/Closing is now the Consummation.