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By: Angela B. Kosar, Esquire
For those of us actively handling residential real estate transactions, whether you are an attorney, title agent, realtor, or lender, a significant change to the familiar procedures will take effect on October 3, 2015.  As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the overlapping and at times contradictory provisions of the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) have been consolidated and clarified into what will now be known as the TILA/RESPA Integrated Disclosure rule (TILA/RESPA rule for short).  Here are some of the key changes that will impact the residential real estate transaction process going forward.

First, the effective date of the Act, October 3, 2015, applies to most real estate loan applications received by the lender on or after that date.  The changes do not apply to home equity lines of credit, reverse mortgages, mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or loans made by persons who are not considered “creditors”. 
Then, the Act imposes a series of significant changes to the process before, at, and after closing:

  1. The original Truth in Lending and Good Faith Estimate forms used by lenders to provide good-faith estimates of credit costs and mortgage transaction terms is now replaced by the Loan Estimate form.
    • The Loan Estimate must be provided to the borrower no later than three business days after the lender receives the loan application.  Categories of information on the Loan Estimate form include loan terms, projected payments, costs at closing (which includes costs you can and cannot shop for and an estimate of cash to close), and other considerations.
    • The Loan Estimate form requires advance disclosure of property taxes, homeowners’ insurance, homeowner or condominium association fees, and other assessments the borrower will be responsible for going forward. 
    • The Lender must supply along with the Loan Estimate a list of providers for whom the borrower may shop, such as title companies, inspection providers, and attorneys.
    • Creditors generally are bound by the original Loan Estimate and may not issue revisions to Loan Estimates because they later discover technical errors, miscalculations, or underestimations of charges.
    • Creditors may only provide a revised Loan Estimate in limited circumstances, such as a change in the borrower’s eligibility for the existing terms of the loan, a revision to credit terms, and changes in interest rate or points.
  2. The original HUD-1 form and final Truth in Lending form is now replaced by the new Closing Disclosure form.  There are some very important timing issues now related to this document that really did not exist before with the HUD and final TIL, as well as some new obligations on the parts of everyone involved in the transaction:
    • The document MUST be delivered to the borrower no later than three business days before closing.  This effectively creates a three day waiting period between delivery of the document and closing.  However, the borrower may waive the three day period for bona fide financial emergencies.
    • Certain changes to the Closing Disclosure trigger a new three day waiting period.  These include changes to the APR of the loan, changes to the loan product, or the addition of a prepayment penalty.  Otherwise, the Closing Disclosure form can be resubmitted at or before closing, and allow for inspection 1 business day prior to closing. 
    • The Lender is obligated to ensure both the delivery of the document to the borrower and that the document is compliant in its contents. While the document may be prepared and even delivered by the settlement agent, the lender retains the obligation to ensure it was delivered and in compliance. 
    • The seller is not required to sign the Closing Disclosure.
  3. The “good faith” provisions of the Act now have some teeth:
    • At closing, the Closing Disclosure is then compared to the Loan Estimate to determine whether good faith exists.  If there are discrepancies (there is a threshold anywhere between zero and 10% of allowable difference between the amounts listed on the two documents depending on the category) The Closing Disclosure must now expressly identify the discrepancies and whether the change exceeds legal limits. 
    • If the amount paid by the borrower exceeds the good faith analysis in certain situations, the lender will avoid liability if a refund is made to the borrower within 60 days of settlement. 
  4. Post-closing issues are dealt with differently as well:
    • If an “event connected to settlement” causes the Closing Disclosure form to become inaccurate, and that inaccuracy causes the amount actually paid by the borrower at closing to change, such as a change in recording fees, a new Closing Disclosure form must be issued within 30 days
    • A new Closing Disclosure form may be issued within 60 days of closing for changes due to clerical errors.  This includes events such as identifying a wrong service provider, but not a wrong property address

So what is the practical impact of these changes? For one, some of the fluidity of the process is eliminated by the timing aspects.  Also, the new forms will require lenders, realtors, and their attorneys to work together earlier in the process to exchange required information (property taxes, HOA dues, etc.).  The changes now put real estate transaction participants, namely, realtors and borrower’s counsel, on alert to carefully examine the documents at closing and be prepared to identify areas where the good faith discrepancy requires a refund to the borrower.  Connor, Weber & Oberlies stands ready to assist home buyers and realtors with the TILA/RESPA requirements and residential real estate transaction process. Please contact us to discuss how we can be involved in your next real estate transaction.