Everyone knows that all interested party contributions need to be disclosed on the Closing Disclosure / Final Settlement Statement, right?
CFPB and TRID / RESPA changes that took effect in October 2015 have both emphasized disclosure rules and placed more responsibility on the shoulders of lenders to ensure compliance. This includes preparing the final settlement statement (Closing Disclosure / CD) and adhering to the 3-day waiting period that must completed before consummation (closing) can occur.
Buyers depend on their Loan Officers to be professional, and to make sure that the lending piece doesn't become the weak link in the chain of events leading to closing. Meeting contracted closing dates requires awareness, attention to detail, and strong support systems to keep processing moving along at the speed of business. Missing a closing date can be an extremely costly mistake, as there are no guarantees that an impatient Seller will agree to extend the date.
So, what happens when a Loan Officer misses an important amendment documenting a Seller contribution toward Buyer's closing costs?
Sloppy processing can derail closing, no doubt. Missing a contribution toward closing costs isn't just a simple correction to a closing disclosure… It requires underwriting approval and new loan disclosures before a new closing disclosure can be issued, adding incremental days to a transaction.
Watch out for POC
Q: We should trust the Loan Officer to know about lending laws, especially now that TRID has launched, right?
A: Take third party information with a grain of salt and perform your own due diligence. You are responsible for your actions.
If a Loan Officer verbally suggests that any missed contribution be removed by amending it out of the transaction and simply "paying it outside of closing" in order for the closing timeline to be met, ask them to put their instructions in writing. Then watch the tap dancing and hand waving start.
CRES Insurance Services, an E&O carrier specializing in risk management for real estate practitioners, advises their Broker clients to be wary of traps that Agents and Consumers can fall into, which would be subsequently construed as mortgage fraud. Seller concessions that are not fully disclosed on the final settlement statement fall into this category, and both of the Agent / Broker parties, as well as Buyer and Seller parties, could be at risk for legal trouble, including significant penalties of monetary fines and/or imprisonment.
CRES states, "There may be times when [a credit] legitimately should be paid by the Seller to the Buyer. In this situation, the Agents should demand a letter from the Buyer's Lender acknowledging that it is aware of the credit and approves of it." CRES cautions that the Agents should be careful that such a letter actually comes from the Lender and not a Mortgage Broker or Loan Officer, who might mean well while inadvertently putting everyone in harms' way with a "quick fix" that falls short of compliance requirements.
Do Not Engage in Under-the-table Exchanges
If parties simply cannot agree to an extension of time for proper disclosure to occur, or if the Lender won't approve the credit transaction parties have otherwise agreed to, don't despair. There may be other contractual vehicles parties can implement within the transaction to solve for a payment from Seller to Buyer, meeting both the Lender's request for a concession removal and full disclosure in writing documenting the agreement between all parties. Laws and standards of practice can vary between states, so it is always best to check any proposed solutions with an attorney (real estate attorney, E&O attorney, title attorney) and your real estate Broker first.