In May 2005, the AAR (Arizona Association of Realtors) purchase contract was rewritten.  Many major changes were made during that rewrite, not the least important being the inclusion of the LSR (Loan Status Report), which replaced the CLA (Conditional Loan Approval).

The biggest difference in the two documents was that the inclusion of the LSR is now an integrated part of the AAR contract.  Lines 62 & 63 of the AAR contract stipulate that the LSR be integrated into the contract as an included attachment thereto.  So, what does that really mean in plane English?

Well...

There has been much bally-hoo about the AAR LSR.  The one question I field almost every time one of our protégés encounter resistance from either a Buyer or Seller is, "Do I really need to include an LSR with the offer".  The answer is not as clear cut as Yes or No.

What one must keep in focus is that all offers are... simply that... an offer of a set of terms and conditions proposed by one party to the other.  When the buyer presents an offer to purchase real estate, using the AAR contract, the buyer, by default by way of lines 62 & 63, commits to deliver a LSR with the offer, with... at a minimum, the top portion of the LSR completed and signed by the Buyer.

Unfortunately, there are very few Buyers who understand the information the Buyer is to provide in the LSR.  Terms such as LTV, CLTV, FHA, Points, Initial Rate, Loan Contingency and more have a tendency to make most Buyers feel like they need to take a college course in lending terminology. Therefore it makes good sense for the Buyer to complete the top portion of the LSR, while conversing with the Buyer's elected lender.

The bottom portion of the LSR was designed to cajole, out of the Buyer's lender, a commitment to cooperate with, not only the Buyer, but also with the Seller and both Buyer and Seller Brokers in open dialogue about the status of the Buyer's loan at any given point in the process.  In the old CLA, and the previous revision of the AAR contract, a week effort was advanced to solicit this cooperation by instructing the Buyer to "instruct the Buyer's lender to send copiers of the loan approval to the Seller and Brokers. The old CLA also contained a line that read, "...Buyer authorizes the lender to provide loan status updates to Broker(s)..."  Most lenders refused to comply with this instruction, citing the GLB (Gramm-Leach-Bliley) Act.  Lenders, who were having difficulties with the borrower's loan, chose to hide behind this federal law and claimed that they had no authority to divulge any information about the loan or progress or loan process.  And... while the lenders were incorrect in their interpretation of the GLB Act, there was all too often little success, if any, to gain cooperation with the Buyer's lender.

Enter the LSR.   The LSR added a line that read, "..Lender agrees to provide loan status updates to Seller and Broker(s) in this transaction..."  It can be argued that LSR is an agreement between the Buyer and Buyer's lender and when signed by both parties, Buyer and Buyer's lender, commits the lender to comply with his agreement to communicate with the Seller and Broker(s) in the transaction.

Now to the question of, "... is the LSR a REQUIRED document to the offer written on an AAR contract form..."  No, the LSR is not required in as much as the AAR contract could be appended by the parties to eliminate the LSR.  However, it would be unwise to do so, if for no other reason than for the Buyer, Seller and Broker(s) to have ingress into the lender's camp for regular updates.

The article below, written by Michelle Lind Esq., General Counsel to the Arizona Association of Realtors, explains this very clearly.

What would happen if an offer is presented without a Loan Status Report (LSR)?

** Loan Status Report (LSR)

First, contact the buyer's broker and request that the Loan Status Report ("LSR") be provided. If the LSR is not immediately forthcoming, present the offer, but advise the seller against accepting the offer without the LSR.  The buyer's obligation to complete the transaction is contingent upon the buyer obtaining loan approval for the loan described in the LSR. If there is no LSR, no loan terms are included in the Contract, which creates an ambiguity in the terms of the loan contingency. 

Further, the information contained in the LSR will allow the seller to better evaluate the buyer's offer.  The LSR addresses purchase price, loan amount requested (the first and second, if applicable), loan to value, combined loan to value, term of loan, maximum interest rate, loan program, and occupancy.  the buyer is also to indicate whether the buyer is relying on the sale or lease of a property to qualify for the loan. 

A recent addition to the LSR requires the buyer to establish the interest rate and "points" by separate written agreement with the lender during the inspection period or the interest rate provision of the loan contingency is waived.  For example, if the buyer does not lock the interest rate specified in the LSR during the inspection period at 6%, but can get the other loan terms described in the LSR when the rates increase to 7%, the buyer will be obligated to close escrow or will be in breach of the contract (after the expiration of the cure period). However if the buyer does not lock, but cannot obtain loan approval for some other reasons, the Loan Contingency is unfulfilled and the buyer is entitled to a return of the earnest money.  Finally, and most importantly, the buyer is asked whether the buyer has had the opportunity to consult with a lender.

Loan Status Update ("LSU")  

The LSU is a companion form to the LSR. In the Contract, the buyer authorizes the lender to provide loan status updates to the seller. These updates may be provided on the LSU form. The LSU is divided into three sub-sections: Documentation, Underwriting and Approval, and Closing. The first sub-section asks whether the lender has received the Contract and whether the appraisal has been ordered or received. (Note: The buyer has five days from notice that the property did not appraise for the sales price to cancel the Contract or waive the appraisal contingency). The Underwriting and Approval sub-section asks whether the lender has obtained loan approval with or without "prior to" doc conditions. The Closing sub-section addresses closing documents and prior to funding conditions.**

At the end of the day, simply put, the AAR LSR is a valuable component to the AAR contract.  If the parties choose to create a work around of any kind, the transaction could be placed in jeopardy. If the Buyer has no contractual agreement from his/her/their lender to cooperate and communicate with the parties and their Broker(s), there is very little that can be done to force capitulation with the Buyer's lender, in terms of complete and honest disclosure of the Buyer's loan progress and process.

Keep in mind too that the current AAR contract holds the Buyer accountable for the performance of the Buyer's elected lender.  If the Buyer's lender fails to support the Buyer's contractual time-line requirements, the Buyer could pay a steep price; perhaps the collapse of the transaction, or even forfeiture of the Buyer's earnest money, given evidence that the Buyer failed to perform his/her/their contractual obligations.

Even if a Buyer's lender provides a Lender's Letter Of Approval, there is little chance that all of the points contained within the LSR would be addressed and this Realtor is convinced that there would be few, if any, banking or lending institutions that would allow the loan officer to fashion a Loan Approval Letter that created or even loosely implied a "Contractual Commitment of Cooperation and Communication" with the Buyer, Seller and their Broker(s). 

It is this Realtor's opinion that allowing either side, Buyer or Seller, to deviate from the intention of Lines 62 & 63 of the contract is simply creating an extremely weak link on the contractual agreement between the parties.

So, is the LSR required, NO... Would eliminating the LSR in its entirety be a prescription for potential disaster? In this Realtors opinion, YES!  It is this Realtor's opinion that allowing either side, Buyer or Seller, to deviate from the intention of Lines 62 & 63 of the contract is simply creating an extremely weak link on the contractual agreement between the parties.