It is often difficult to decipher all of the information and terms on a mortgage loan disclosure. Yet with a signature, they bind us far into our futures. On October 3, 2015, those disclosure requirements changed for the better. They have been simplified so that mortgage terms will be easier to understand for consumers. Likewise, regulations affecting the reporting of community association fees and charges have been relaxed so that lenders can rely on several different sources to compile the information needed for disclosing community association fees and charges.
The Dodd-Frank Act
In response to the recent recession, the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into federal law by President Barack Obama on July 21, 2010. The Dodd-Frank Act made the most significant changes to financial regulation in the United States since the Great Depression. On December 2, 2009, the proposed bill was introduced in the House of Representatives by then Financial Services Committee Chairman Barney Frank, and in the Senate Banking Committee by former Chairman Chris Dodd. The Dodd-Frank Act implements changes that, among other things, affect the oversight and supervision of financial institutions, including how information is disclosed to consumers during the mortgage loan process.
The Know-Before-You-Owe Rule
The Dodd-Frank Act directs the Consumer Financial Protection Bureau (the Bureau) to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan. The Dodd Frank Act requires the Bureau to issue federal regulations protecting consumers from abusive financial products and services. The Bureau’s Know-Before-You-Owe rule protects consumers who are financing the purchase of a home or refinancing an existing mortgage loan by (1) improving consumer understanding of the mortgage lending process, (2) helping consumers shop for the best mortgage by making loan comparisons easy to understand, and (3) preventing surprises at the closing table through early disclosure of fees.
The Know-Before-You-Owe rule is the most substantive change in the mortgage lending and closing process in decades. Lenders and title companies must, by law, comply with the rule’s new requirements or risk significant fines for non-compliance.
October 3, 2015 Amendments
However, the Know-Before-You-Owe rule, while protective to consumers, was somewhat confusing and difficult to understand. As a result, effective October 3, 2015, the Bureau amended these regulations to establish new disclosure requirements and forms that are intended to be easier for consumers to understand. The Bureau created two new forms: (1) the Loan Estimate, and (2) the Closing Disclosure. Lenders will be required to give consumers these forms for mortgage applications submitted on or after August 1, 2015. The changes seek to simplify and improve disclosure forms for mortgage transactions.
Impact on Community Associations
The October 3, 2015 amendments will benefit community associations as well as consumers. Specifically, lenders must provide assessment and other association charges, as available, to the consumer via the Loan Estimate. Examples of association charges reported on the Loan Estimate include the following:
1. Dollar amount of regular assessments
2. Dollar amount of special assessments
3. Dollar amount of transfer fees
4. Miscellaneous move-in/transition fees charged at closing
Lenders must comply with strict timelines when delivering the Loan Estimate and Closing Disclosure to consumers. Lenders must provide consumers a written Loan Estimate within four (4) days of a consumer’s request and consumers must be provided a Closing Disclosure three (3) days prior to closing. Failure to comply with these timelines can lead to substantial fines being imposed on the lender by the Bureau.
As the Bureau developed the Know-Before-You-Owe disclosures, the Community Associations Institute (CAI) advocated for flexibility in disclosing community association assessments on the Loan Estimate form. CAI argued it would be inefficient and burdensome for associations to provide assessment information on the same property to multiple lenders as consumers shopped for the best mortgage loan. Responding to CAI’s concerns, the Bureau will allow lenders to use a “best-information-available” standard for association information when preparing a Loan Estimate. A lender may obtain association information from the following sources:
1. The MLS listing
2. The seller
3. The resale disclosure certificate/estoppel
4. Real estate agent
5. Title company
6. Community website
7. Community association or its managing agent
8. Other sources
While the Bureau does not allow the use of the “best-information-available” standard for preparation of the Closing Disclosure (lenders and title companies must verify all association charges and ensure all information on the Closing Disclosure is accurate), the best-information-available concept for the Loan Estimate disclosure is beneficial as it relates to community associations. In addition, community associations and community managers can help the process by ensuring information submitted to lenders is accurate and timely and by providing a copy of the community association fee schedule with all completed uniform mortgage questionnaires, resale disclosure documents, estoppels, and pay-off letters to settlement agencies, attorneys. The community association can and should also post the community’s fee schedule on the community association website.
Ultimately, these amendments to the Know-Before-You-Owe disclosure process are positive and helpful to consumers, lenders and community associations.
Brian D. Moreno, Esq. is a senior associate at Swedelson Gottlieb and an experienced litigator and community association attorney, having practiced common interest development law since 2003. Moreno has been a featured speaker at CAI events (including the 2015 National CAI Law Conference), as well as an approved instructor for various chapters in Southern California.
In 2013, Moreno was the 20th California attorney to be admitted to CAI’s College of Community Association Lawyers. He serves as the Co-Chair of the Programs Committee for the Greater Los Angeles Chapter, as well as a member of the Education Committee for CAI’s Greater Inland Empire Chapter. He is also a member of the California Legislative Action Committee‘s Public Relations Committee and serves on CAI’s National Law Seminar Planning Committee.