Major changes are coming to real estate transactions. Starting on August 1, any transaction involving a mortgage will use the new disclosure forms created by the Consumer Financial Protection Bureau (CFPB). NAR has compiled a lot of information on this topic at www.realtor.org/respa, so this article will briefly summarize the changes and then focus on how the changes will affect association form contracts.
The Truth-in-Lending Act/RESPA Integrated Disclosure (TRID) creates timing requirements for disclosures that lenders need to make to consumers. Not only will the new forms be used in transactions, the relationship between the lender and other parties like the closing agent and the mortgage broker is now altered because the lender can be liable if certain costs exceed the tolerance limitations set forth in the TRID. In addition, the changes may also delay a transaction if certain changes occur near closing, as TRID requires a three-day waiting period prior to closing and certain changes may cause lender delays.
The new disclosure timing requirements need to be addressed in the model form contracts that many REALTOR® associations create. All associations that create form contracts need to revisit the timelines established in these agreements, as the process for completing a real estate transaction will be altered starting on August 1.
One important issue that may need to be addressed is the buyer’s duty to close the transaction on a certain date. Since TRID may cause delays in the transaction through no fault of the buyer, purchase contracts need to be adjusted so that the buyer is not in breach of the agreement for not closing on a certain date. As stated above, TRID will cause the reset in the three-day waiting period in certain instances, but the lender may also cause delays due to the new tolerance limitations. For example, a problem with the home’s plumbing could potentially require the lender to seek a new valuation of the property, which, in turn, could require new disclosures and a delay in the transaction. Thus, the buyer’s obligation to close should not be required on a certain date since the potential for delays can cause this date to move.
In addition to the buyer’s obligation to close, all other timelines need to be reviewed. For example, a financing contingency that requires an immediate application by a buyer may not be practical, as the Loan Estimate won’t be a final commitment by a lender and is potentially subject to change. In addition, a lender can’t order an appraisal until the buyer evidences intent to proceed with the transaction, which could be almost three weeks after the initial application. The association should work with lenders and closing agents in its area to help revise its contract, as those groups will be familiar with how the rule will be implemented and will have insight into workable timelines for a transaction.
A few associations have already considered the changes that need to be made to their forms. Some have made changes to their forms by including language that the contract will extend if the closing is delayed through no fault of either party. Others have found that their existing contract adequately covered the delay scenario. Finally, many associations have decided to take a wait-and-see approach, as they want to see how the new process works before adapting their contracts.
TRID disclosures will change the timing for transactions involving a mortgage. REALTOR® associations who create form contracts should review these contracts in light of these new requirements. Real estate professionals will need to help their clients understand how the changes will impact the transaction, explaining how the transaction may take longer and that there is possibility for delays.
This column is brought to you by the NAR Real Estate Services group.
Finley Maxson is senior counsel for the National Association of REALTORS®.
For more information, visit www.realtor.org.
