Grace Period With New Closing Process?
May 13, 2015
REALTORS® are requesting that Congress approve a grace period for the enforcement of a new closing process for residential transactions, which is to take effect Aug. 1, so parties can become accustomed to the changes. That's a top priority for the 8,000 REALTORS® in Washington, D.C. this week for the 2015 NAR Legislative Meetings & Trade Expo, which includes visits to Capitol Hill to meet with members of Congress.
REALTORS® will also educate lawmakers on the risks of tinkering with real estate tax incentives, including the mortgage interest deduction on the residential side and 1031 like-kind exchanges on the commercial side. They'll also highlight the need to proceed thoughtfully when the time comes to reform the secondary mortgage market and FHA, which are critical to the smooth functioning of the country's mortgage finance system and the broader economy.
REALTORS® will also alert lawmakers to concerns over important business issues such as patent reform, data privacy, and net neutrality. Patent reform is important because practitioners and companies are getting hit with frivolous demand letters and lawsuits from so-called patent trolls (companies that buy overly broad patents in an effort to extract fees from product end-users), and data privacy is important because professionals want to be sure data retention and reporting requirements are fair for small businesses. Net neutrality is an issue because real estate companies don’t want their online search sites and other websites penalized by a fast-lane, slow-lane approach to the Internet.
The letter seeking a grace period for the closing process changes was written by Reps. Andy Barr, R-Ky., and Carolyn Maloney, D-N.Y. It would provide liability relief to lenders for several months so settlement service providers can get a sense of how well the new procedures will work. There is considerable concern in the industry that the new procedures could delay closings and open lenders to liability should the closing hit unexpected bumps. Increased lender liability is a concern of real estate professionals' because risk-averse lenders could delay closings as they proceed in an overly cautious manner in response to the new rules.
Under the closing process changes, which were developed by the Consumer Financial Protection Bureau, the HUD-1 settlement form, the Good Faith Estimate, and the Truth in Lending Act disclosure form will be consolidated into two new forms, a Loan Estimate and a Closing Disclosure.
In addition, the Closing Disclosure will have to be given to the buyer three days before the closing, and if certain changes are made after that point, the closing would be delayed another three days.
CFPB Director Richard Cordray spoke before REALTORS® earlier in the week, saying only three types of changes could lead to a closing delay: a change in the loan product (such as from a fixed-rate loan to an adjustable-rate loan), the addition of a prepayment penalty, or a change in the annual percentage rate of more than 1/8 percent (1/4 percent in the case of an adjustable-rate loan).
Although only these three events would trigger a delay, settlement service experts who have studied the changes say other events could unintentionally force delays as well. For example, lenders will have to delay the closing if parties agree at the closing to make even small or routine changes to what conveys to the buyer.
In addition, as a practical matter, lenders will need to get the Closing Disclosure finalized a week before the closing to ensure the buyer gets it within the three-day timeframe.
Because of these and other issues, there remains dozens of uncertainties that could lead to unexpected liability risk to lenders, so a grace period is needed to get familiar with how these changes will play out.
REALTORS® will be on Capitol Hill Wednesday and Thursday for meetings with their members of Congress.
—By Robert Freedman, REALTOR® Magazine
Updated: August 16, 2019