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from Local Attorney, Michael H. Wasserman

Thursday, July 30, 2009

NEW FEDERAL "REGULATION Z" CHANGES START TODAY - and how at least one contract was saved from its clutches...

The rules of the game change today as new federal regulations governing "Good Faith" Estimates of closing costs (GFEs) and Truth in Lending Disclosures (TILs) go into effect. TIL statements disclose a loan's APR - a measure of the effective interest rate after taking certain closing costs into account. The days of quick mortgage-financed closings are gone. Period. End of Paragraph.

Simply put, the fastest anyone is going to possibly be able to close is 7 business days after the lender delivers its GFE and TIL. That assumes everything goes flawlessly in the mortgage approval process. If there was a significant mis-statement of closing costs that results in a 1/4 % change in the APR before closing, new disclosures must be given and a new 3 business day waiting period must follow.

These regulations are likely to wreck havoc with closing schedules for the foreseeable future - at least until mortgage lenders and title companies adopt new work flows. Preliminary GFEs and TILS are notoriously inaccurate documents. Lenders routinely under-estimate actual closing costs. Under the current system, the documents would simply be amended & buyers would re-sign them at the closing table. Now, we will cancel closings and wait three days.

Good luck to anyone who schedules movers or cancels their lease, or plans to buy a new home the same day they sell their old one.

How are the title companies planning to deal with this change? I've spoken to representatives at First American and at Chicago Title, the two largest operators in the Chicago market.

One indicated that they are hiring and training new respa / closing department personnel to contact lenders as early as possible, once a closing is scheduled to try to better coordinate on the preparation of preliminary HUD-1/RESPA settlement statements. Their goal is to let lenders know if there will be a change in the TIL early enough to allow them time to issue out revised / final TILs without delaying closings. I suppose this strategy could be likened to the early bird hoping to catch the worm.

The other is planning on issuing title commitment invoices that include every conceivable title charge - whether needed, or requested - to encourage lenders to issue GFE's that OVERSTATE the actual charges and resulting APRs. That company's interpretation of the new law suggests that revised TILs will only be needed when they understate charges. In essence, their approach is "better safe, than sorry."

Will either approach work? Only time will tell. The real problem here is not going to be title company communication with lenders. It is going to be the lenders who habitually wait until days or hours before closing to get things done. Lenders, you see, simply do not clear many loans to close until days (hours) before the scheduled closings. RESPA settlement statements (showing all of the closing costs) are not prepared until lenders loans are approved, and they get around to telling the title companies what charges to include on those settlement statements.

SO HOW WILL THIS PLAY OUT FOR REALTORS & CLOSING LAWYERS? Contracts simply must be drafted with realistic mortgage contingency and closing dates. I am recommending that my clients do two things: (a) set closing dates at least 30 days after the date of the contract and (b) lengthen the time between the mortgage contingency date and the closing date to no less than seven calender days. Setting unrealistic targets is only going to anger clients and frustrate their abilities to plan for their move-ins and move-outs. Building more time into the contracts will at least allow the possibility that the lenders and title companies will have opportunity to coordinate and get timely, accurate TILs to buyers, so that we can all close on time.

Please let me know if you have any questions about this important change in the law; or how you can protect your contract or your client's contract