QUESTION
Good afternoon! I have loan officers
inquiring about the possibility of sending out Closing Disclosures (CDs) prior
to loan approval from underwriting. They feel this helps them retain borrowers
through closing and motivates borrowers to cooperate in providing any remaining
documents needed. We have always taken the stance of not sending until CDs
until final underwriting approval because we do not want to mislead borrowers
into believing their loan has been approved when it has not. However, I do not
want to put my loan officers at a disadvantage. Any guidance you could provide
us on this issue would be welcome.
ANSWER
Your concerns about misleading the
borrower into thinking that their transaction is about to close or that they
can’t “bail out” are well founded. But, even more significantly, there are
fundamental risk management issues associated with implementing such a
procedure. In that regard, while it may
be legally permissible to issue the CD before a “clear to close,” there are a
host of operational issues that need to be considered before implementing such
a procedure.
These issues arise out of the complexity
of the interrelationships between early and final disclosures under the TILA-RESPA
Integrated Disclosure Rule (“TRID”), as well as the relatively rigid time
frames under that Rule with respect to what must be disclosed and when,
not to mention the time frames of the underlying real estate transaction in a
purchase money loan situation.
Before going forward, these need to be
carefully considered and “vetted” in terms of their overall impact on
compliance management systems. A lot more is involved than simply giving borrower
a disclosure saying that receipt of Closing Disclosures does not necessarily
mean that their loan has been approved!
1. As a general matter, it is important
to remember that the TRID disclosure rules are extremely complex and
interdependent and are set up based on the model that CDs are normally not
going to be issued until after “clear to close.” Altering that model “pushes
the envelope” on applicable compliance rules and consumer expectations and
therefore definitely increases the risk that consumers may be misled. That
doesn’t mean it can’t be done, it just means that additional care must be taken
to make sure that consumers are not misled in any way.
2. It is axiomatic that results of
underwriting may necessitate changes in the loan product or interest rate. Such
changes may require not only a revised CD but also a delay in consummation of
the transaction to permit the required 3 day waiting period to elapse.
Thus, Reg. Z 1026.19(f)(2)(ii)
provides:
“(ii) Changes before consummation requiring a new waiting
period. If one of the following disclosures provided under paragraph (f)(1)(i)
of this section becomes inaccurate in the following manner before consummation,
the creditor shall ensure that the consumer receives corrected disclosures
containing all changed terms in accordance with the requirements of paragraph (f)(1)(ii)(A)
of this section:
(A) The annual percentage rate disclosed under §
1026.38(o)(4) becomes inaccurate, as defined in § 1026.22.
(B) The loan product is changed, causing the information
disclosed under § 1026.38(a)(5)(iii) to become inaccurate.
(C) A prepayment penalty is added, causing the statement
regarding a prepayment penalty required under § 1026.38(b) to become
inaccurate.” (Emphasis added.)
Therefore, issuing CDs before
underwriting approval may greatly increase the frequency with which revised CDs
need to be given and, by creating the necessity of a new three (3) day waiting
period, may impact closing timelines of underlying real estate transactions in
purchase money loan situations.
3. Issuance of the CD cuts off a
lender’s ability to issue a revised Loan Estimate (“LE”). Thus, issuing the CD
before “clear to close” means that you may not be able to issue a revised LE to
reflect any increased loan costs that come up during underwriting, thereby
exposing you company to greater risk of penalties for incorrect initial
disclosures. This of course has to be balanced against any benefit achieved
from avoiding borrower “fall out” by issuance of the early CD.
Some lenders who do issue “early” CDs
attempt to address this situation by creating specialized “Early CD Request
Procedures” that nail down fees and costs early in the process, closely
coordinate settlement dates, time frames and charges with settlement agents in both
purchase and refi situations, and establish a series of conditional loan approvals
closely linked to the underwriting process which make it virtually certain that
any loan that does qualify for an
early CD will in fact be approved by underwriting without changes. Such
procedures need to be carefully integrated into the company’s entire origination,
disclosure, and training operations so that loans on the “early CD track” do
not get mixed up with other loans on a more traditional time schedule.
4. Careful consideration also needs to
be given to the kinds of transactions
in which such procedures would be adopted. Obviously, the disclosures associated
with adjustable rate loan transactions are going to be much more complex and
time sensitive than those for simple fixed rate transactions.
5. Finally, detailed attention needs to be given to
whether the transaction in question is a purchase loan or a refinance. Purchase
transactions usually have much tighter time frame requirements that can be
impacted by additional waiting periods resulting from the necessity of issuing
a revised CD. Since changing closing
dates in purchase transactions can create havoc for both buyers and sellers –
and their brokers – procedures and expectations need to be worked out with
settlement agents to make sure that there are no ugly last minute surprises
created by erroneous “Early” CDs.
Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group
