Changes to the Closing Process
For over 50 years, real estate closings have operated under essentially the same rules. We have been governed by HUD and used HUD approved forms, including the HUD-1 Settlement Statement. While lending standards and closing documents have been tweaked and adjusted, the closing process has become a familiar routine. On August 1st, the industry will undergo a sea-change and you will need to learn new routines, new documents, new timeframes, and adjust to an entirely new closing landscape.
The Need For Change - Financial Reform
These changes are a reaction to the financial crash of 2008 and the Great Recession. Congress passed the Dodd-Frank Act to provide consumer protections and reform financial transactions. The law created a new regulatory agency called the Consumer Finance Protection Bureau or CFPB. For decades, the mortgage and closing process was governed by two laws: The Truth in Lending Act (TIL) and Real Estate Settlement Procedures Act (RESPA). These laws overlapped, had gaps, and led to confusing documents and disclosures. The Dodd-Frank Act requires the CFPB to combine the documents and disclosures from the old laws and integrate them into new forms to simplify, clarify, and improve the closing process.
What Has Changed
The changes to loan and closing procedures are far more than a few new documents. The biggest changes are to the closing time-lines.
The HUD-1 and Truth in Lending forms will be replaced by a new "Closing Disclosure." Expect additional, new closing statements and disclosures.
You will need to learn a new vocabulary. Some common
TRID = TILA/RESPA Integrated Disclosure
CD = Closing Disclosure
Consummation = Closing
CFPB = Consumer Finance Protection Bureau
New timing and delivery requirements will change the way we handle closings. This is the BIG news! What you NEED to know about timing: The final Closing Disclosure must be delivered and received no later than 3 business days prior to closing.. If the lender sends the final documents 6 business days prior to closing, they don't need to prove the buyer(s) receipt. Most lenders will mail the closing disclosure 6 business days before closing. This pushes back the time frames for closing and makes it harder, if not impossible to address late breaking changes or issues in the days leading up to closing. Lenders will have less time to get loans approved and the parties will have much more difficulty making last minute changes and adjustments.
How This Affects Buyers, Seller, Realtors & Attorneys
These new rules will affect everyone in the Real Estate industry. This is a short list of considerations:
- Buyers need to understand the new rules and landscape of lending. Realtors and attorneys need to educate buyers early in the process
- Buyers need to move faster in seeking loan approval. They cannot wait until hours or even a few days before closing. The loan must be finalized over a week before closing (6 business days).
- Provisions in the offer to purchase may need to be adjusted to address these new time frames, including the final walk through and deadline for the seller to cure any defects. Both currently provide for 3 days prior to closing. These time frames may need to be extended to 6-7 business days prior to closing.
- All parties must understand that these rules will add time to closings and to the lenders' approval process. Allow more time from acceptance to closing, avoid back to back closings, and expect delays.