“Cooling Off” – How New Borrowing Rules Affect You

Beginning in October 2015, all borrowers of residential loans from commercial banks in the United States are subject to new laws put in place by the Consumer Financial Protection Bureau, or “CFPB.”  The new law was in response to the financial collapse and housing market crisis of 2008.  The new law replaces the old “HUD-1” forms, with new disclosure forms which purportedly make it easier for the consumer to understand the terms of the loan.  Loans under the new law are referred to as “TRID” loans, short for “TILA-RESPA Integrated Disclosure.”  The new rules require the consumer to receive the TRID disclosure at least three days prior to closing on the purchase of a new home, or what I call the “cooling off” period.  This has created numerous problems, err… “growing pains” in the real estate law world.

Under the new rules, adjustments to any of the numbers that are on the TRID disclosure forms require another three day “cooling off” period where the consumer must receive a completely new disclosure, and must have three days between that time and the closing.  Prior to the new rules, adjustments would sometimes be made at the closing table, and the bank attorney would just draft a new HUD-1.  Because of the new TRID regulations, if this were to happen at closing, the closing would be forced to adjourn (be postponed), to allow the borrower to receive a new TRID disclosure form three days prior to closing.  Already in the first few months of the TRID rules being in place, bank attorneys have become frustrated with the amount of closing adjournments.  This has now led to bank attorneys setting deadlines for having figures given to them by both parties.

How it Affects You

Because of the new TRID rules, attorneys representing the lender now set deadlines for closing figures to stave-off any possible adjournments, and allow some cushioning.  It is not uncommon to come across bank attorney offices that will not set a closing date sooner than seven days before a closing.  Some bank attorneys even require two weeks!  This poses a problem for several reasons.  Among the top reasons: rate-lock expiration.

In today’s world of low interest rates, a rate-lock is a valuable thing.  Additionally, renewing a rate lock can sometimes cost thousands of dollars, or even cause the mortgage commitment to expire.  Rate-locks often last 60 days from the date of issuance of the mortgage commitment. Closing must take place within those 60 days of the rate-lock issuance to avoid any issues.  Now, if a bank attorney has a policy where they cannot set a closing date less than 14 days after getting the closing figures from all parties, that eats up 14 days of the 60 day rate-lock.  Now the rate lock is essentially a “46 day rate-lock.”  Two weeks of time between Contract and Closing is very valuable.  Surveys must be ordered, tax adjustments must be made, title exceptions (such as open permits/liens/judgments/etc.) must be cleared, etc.  All these things take time, and now losing 14 days of rate-lock period shrinks the available amount of time, resulting in deals possibly falling through.

What You Can do to Help – The Buyer/Borrower

First, communication with your attorney is crucial.  Obviously, an attorney (at least a good one) will know that you are financing.  However, you need to keep your attorney advised of all the people you have been working with at the bank and give your attorney the mortgage commitment with the included rate-lock expiration date.  Doing this right away will allow the attorney to determine whether it will be fairly easy to clear up some conditions for the mortgage commitment, or whether time will be of the essence.  The attorney will also examine the title report right away and order a survey (if necessary), and can place a rush order on those items should it be necessary.  By doing these things right away and keeping in touch with your attorney, it will avoid unexpected surprises that may push the limit of the “46 day rate-lock.”

Second, be your own best friend.  If you have to provide the bank with proof of income such as tax returns, W-2s, 1099s, etc. make sure you do that right away.  Furthermore, if you have to pay down some existing debt to get the debt-to-income ratio in compliance, do it!  Neglecting your duties will hold up a closing and allow a rate-lock to expire.  So be your own best friend and get those things done – an attorney cannot help you get your own paperwork in to your bank.

What You Can do to Help – The Seller

As the seller, you may think “what the buyer does with his lending doesn’t matter to me, so long as I get that bank check,” which is fine, except – the seller will not get that bank check if the buyer’s funding falls through.  Sellers must take proactive measures.

First, if you know that the shed in your backyard, or the gas line installation from the street was permitted but not signed-off on tell that to your attorney.  Do not wait until the title report comes in to take action.  Call the Town and make sure the shed’s Certificate of Occupancy has been completed and signed-off on.

Second, do not assume your lawyer knows everything about you.  One example of this is not informing your attorney that you are a foreign national.  In real estate transactions, certain taxes must be withheld from the transaction if you are a foreign national and the property is being used for certain purposes.  If it is found out that you are a foreign national during the three day “cooling-off” period for TRID loans, closing will get adjourned.

Third, if you’re using a Power of Attorney, let your attorney know as soon as you find out/plan on it.  Oftentimes, title companies require pre-approval of Powers of Attorney and for good reason: sometimes people prepare awful Powers of Attorney where the Powers of Attorney are legally insufficient.  Thus, another reason closing can be adjourned.

Conclusion

If you haven’t seen the recurring theme here, it revolves around awareness and communication.  Where attorneys and their clients know all the facts and circumstances, the new TRID loans and their requirements will be an afterthought because all parties will be prepared from day one.  Attorneys must get cranking on the work right away, and clients must lay it all out there.  This is what lending and borrowing has come to in a post-Great Recession world.  It’s all about “cooling-off.”

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