The Ritter & Randolph, LLC Blog

The 3-day Loophole

The anticipation can be felt in any closing nowadays. The anticipation for the new TILA-RESPA rules to take effect, that is. And, although they are not going to go away, people keep talking about them like they will. One of the biggest, if not THE biggest change is the implementation of the 3-day Closing Disclosure rule. The rule states that the new Closing Disclosure (CD) form (as discussed in my previous blog) needs to be in the hands of the borrower at least three days before the closing. This rule and the CD itself is fear inducing fodder for conversation among those in real estate.

I was recently at a seminar on the new rules when a representative for a lender, who was not the key speaker, brought up a very significant point. He mentioned a legal “loophole” in the 3-day rule that, according to him, most banks/financial institutions will take advantage of.

The loophole is as follows: the rule states that the Disclosure has to be in the hands of the borrower at least three days from the closing. Notice how there is no at most language. What this means is that lenders can deliver the CD any time prior to the three days. This could be two weeks or three weeks prior to the closing. How is that a good thing? Well, what a lender could do is deliver the CD any time prior to the three days regardless of complete accuracy of the information therein and they will have satisfied the rule. Then, if there are any changes, they have up until one day before the closing to get the CD to the borrower thus extending the time for them to get the CD to the borrower by two days.

The 3-day rule does not restart unless one of the three following changes occur:

  1. If there is a change to the APR by more than 1/8% for most loans (and 1/4% for loans with irregular payments or periods);
  2. Changes to the loan product (i.e. from a 30 year to a 15 year); or
  3. An addition of a prepayment penalty to the loan.

These are significant changes that do not regularly happen and thus would affect most closings. So a lender could issue the CD two weeks prior to the 3-day rule and then continue reissuing CDs up until 1 day prior to the closing provided none of the above three changes are made.

All in all, this is definitely going to be a challenging time in the real estate world. However, I believe the more familiar we get with the new rules, the more comfortable we will be, and the more we may actually see light at the end of the tunnel.