Does Paragraph 5(a)of the FR/Bar Contract Always Protect Your Buyer if Lender Is Not Ready to Close?
By: Michael G. Salmon, Managing Attorney at SalmonLaw PLLC and Member of The Fund
Liquidated damages ensure that earnest money deposits are central elements of real estate transactions utilizing the FAR/Bar residential sales contracts – the standard or “as is” contract (the “FAR/Bar Contracts”). As such, it should not be surprising that buyers and sellers have opposing motivations with respect to deposits. It is reasonable to expect real estate professionals representing buyers to get creative in protecting and/or recovering their clients’ deposits when real estate transactions go sideways. The route increasingly travailed by buyers, mortgage lenders and Realtors® is Paragraph 5(a) of the FAR/Bar Contracts relating to the Consumer Financial Protection Bureau Closing Disclosure delivery requirements (the “CFPB Delivery Requirements”), which come under the Know Before You Owe mortgage disclosure rule (i.e., TRID).
Pursuant to Know Before You Owe, residential mortgage lenders are required to provide borrowers with a Loan Estimate that discloses good faith estimates of important loan terms and closing costs. Generally, estimates of important loan terms and closing costs are deemed disclosed in good faith if they do not deviate from the Loan Estimate, subject to certain tolerances. The Closing Disclosure is the form on which mortgage lenders disclose a comparison of the Loan Estimate and the final terms of the mortgage loan. Most importantly for present purposes, the CFPB Delivery Requirements stipulate that mortgage lenders deliver the Closing Disclosure to borrowers at least three (3) business days prior to closing a mortgage loan.
The Florida Association of Realtors®/Florida Bar Joint Committee (the “Committee”) revised the FAR/Bar Contracts to conform Paragraph 5(a) with the obligations of the CFPB Delivery Requirements. The revision protects a buyer’s deposit by automatically extending the Closing Date if a mortgage lender is unable to close a mortgage loan on the Closing Date. This gives rise to the question: What circumstances trigger the buyer protections in Paragraph 5(a)? The consensus among many real estate professionals appears to be that Paragraph 5(a) protects a buyer if their mortgage lender is not prepared on the Closing Date for ANY reason. This, however, is a potentially tragic misunderstanding.
It is important for real estate professionals to understand that the Committee drafted the language of the revision specifically and narrowly. Paragraph 5(a) was never intended to be a general backstop protection for buyers with respect to mortgage lender missteps. Paragraph 5(a) sets forth two triggers for buyers to come under its protections: (i) Paragraph 8(b) of the FAR/Bar Contracts must be checked and (ii) the unavailability of Closing funds from buyer’s mortgage lender on the Closing Date is specifically due to the CFPB Delivery Requirements. Further, the Closing Date is not automatically extended for a period of ten (10) days. The Closing Date is only extended for the period necessary to satisfy the CFPB Delivery Requirements, which cannot exceed ten (10) days. Clearly, the Paragraph 5(a) protections are not available at every instance of a mortgage lender being unprepared on the Closing Date or Closing funds being unavailable on the Closing Date.
So, where does this leave real estate professionals facing a potential mortgage lender delay in the run-up to Closing? First, real estate professionals have a duty to act in the best interests of their clients. To the extent that there is the slightest of uncertainty as to whether or not a mortgage lender delay will be caused by the CFPB Delivery Requirements, real estate professionals should strongly encourage buyers to enter into an executed extension of the Closing Date in order to avoid a potential material breach of a FAR/Bar Contract. Proceeding this way allows Paragraph 5(a) to be a valuable backup measure in the event a seller balks at entering into an extension of the Closing Date. In addition to negotiating an extension, real estate professionals should advise their clients to work closely with their mortgage lenders to build a strong written record in support of their understanding that an impending Closing delay is related to the CFPB Delivery Requirements. In fact, this may be helpful in negotiating an extension with a seller reluctant to enter into an executed extension of the Closing Date.
The foregoing immediately raises several questions:
- Are the Paragraph 5(a) protections applicable if the CFPB Delivery Requirements are just one of many reasons for a Closing delay?
- Do the Paragraph 5(a) protections automatically reset if there is more than one closing delay caused by the CFPB Delivery Requirements?
- If a buyer does not receive a revised Closing Disclosure because it was contained in an email that went to their junk email folder, are the Paragraph 5(a) protections available if the buyer wants to delay the Closing?
- Does an executed attachment to a FAR/Bar Contract that amends the terms of a transaction from a cash closing to a financed closing negate the availability of the Paragraph 5(a) protections if Paragraph 8(b) is left unchecked?
These questions will not be examined here. However, it suffices to say that litigation is very expensive, so an amicably negotiated extension of the Closing Date is a real estate professional’s best friend.