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REAL ESTATE Real Estate Law Update Coming Soon… New Closing (no, Consummation…) Rules! Now Starting October 3, 2015 Instead of August 1, 2015 By: Maria Di Stravolo Elliott, Esquire What?! We can’t call it a closing anymore? Under new federal regulations regarding the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”), the terminology for a “closing” or “settlement” is now a “consummation”, a “borrower” is now a “consumer”, the HUD-1 Settlement Statement is going away, and the substitute form, called the Closing Disclosure, needs to be delivered to the consumer three business days before consummation. The changes were slated to begin on August 1, 2015, but the Consumer Financial Protection Bureau (“CFPB”), which enforces these regulations, recently issued a final rule on July 20, 2015 extending the date to October 3, 2015 instead. Many residential lenders and settlement agents, as well as real estate agents and brokers, are starting to embrace and prepare for these changes. Builders should also become aware of these new rules because the timing of disclosures forms and certain changes to the forms can affect when consummation occurs. A delay in the effective date, however, will provide the mortgage financing and construction industry more time to prepare for the transition so that upcoming settlements (or rather consummations) will not be painful for borrowers/consumers.
What are these new rules? To protect consumers from a repeat recession, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”). The Act not only created the CFPB as a new federal agency to enforce consumer protection laws but also directed the CFPB to integrate mortgage loan disclosures under TILA and RESPA. In 2013, the CFPB issued the new TILA-RESPA Integrated Disclosure (“TRID”) rule, which integrates 4 separate disclosure forms into two forms, provides timelines as to when lenders deliver them to the consumer, and sets different tolerances for changes to the forms.
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For the first form, the Good Faith Estimate and the initial Truth-in-Lending disclosure have been combined into one form, called the Loan Estimate. The Loan Estimate discloses information about the costs and risks of the mortgage loan. Lenders are required to deliver the Loan Estimate to consumers three business days after the consumer has submitted a loan application to the lender. The Loan Estimate is easier for consumers to learn information about their mortgage loan. For example, if a consumer has a variable interest rate, the form will now disclose the changes in payments over the life of the loan. The new rule also dictates certain tolerance levels as to how much the Loan Estimate can change by the time closing (or consummation) occurs. For example, there is zero tolerance for changes to lender and mortgage broker charges. For the second form, the HUD-1 Settlement Statement and the final Truth-in-Lending form have been combined into the Closing Disclosure form, which is to be provided to the consumer three business days before consummation instead of a day before or at closing. A new three-day waiting period (and delay in consummation) will be required if the applicable percentage rate increases by more than 1/8 percent for fixed-rate loans and 1/4 of a percent for variable-rate loans, if the loan product changes (such as fixed-rate to variable), or if a prepayment penalty provision is added.
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Do these changes also affect construction loans? Yes. Previously, construction only loans were exempt from RESPA but with the new rule, these loans are no longer exempt. In addition, the new rule was recently revised with respect to new construction loans so that lenders may state on the Loan Estimate that a revised form may be provided where the lender reasonably believes that consummation will occur more than 60 days after the initial Loan Estimate is given. This revision allows lenders to accommodate changes in estimated charges and therefore is an exception to the tolerance levels. What are the penalties if someone violates the new rule? The penalties range from up to $5,000 a day for any violation of a law, rule or final order or condition imposed in writing by the CFPB; up to $25,000 per day for any person that recklessly engages in a violation of a federal consumer financial law; and up to $1,000,000 per day for any person who knowingly violates a federal consumer financial law. The CFPB has the power to enforce the new TRID rule and is currently enforcing consumer financial laws, such as the affiliated business arrangement laws. The CFPB has been diligent in enforcing current laws and regulations so this trend will more likely continue with the new TRID rule.
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How should the mortgage industry prepare for the changes? Lenders, realtors, title agents, and builders should have their paperwork ready at least a week in advance of closing/consummation to avoid surprises and delays. Some realtors are also anticipating a two-step inspection process to avoid major changes to the Closing Disclosure form at closing. More importantly, communication among the parties early in the process will be the key to a smooth transaction. To learn more about the new forms, visit the CFPB website: www.consumerfinance.gov/knowbeforeyouowe. A copy of the of CFPB’s press release regarding the extension date can be found at www.consumerfinance.gov/newsroom/cfpbfinalizes-two-month-extension-of-know-beforeyou-owe-effective-date/.
Title Insurance Update By: Derek Dissinger, Esquire Tax credits have played a significant role in the development of real estate in central Pennsylvania over the last several years. York County and Lancaster County, for example, are home to many historic buildings which investors have developed utilizing historic tax credits, while maintaining the historic integrity of the property. Often institutional investors will join in as limited partners with a developer to obtain valuable tax credit benefits. Pennsylvania has now adopted two title insurance endorsements (PA Endorsement 1570 and PA Endorsement 1580) designed to protect the tax credit investors’ interest in the tax credit. The endorsements insure against a reduction in the value of tax credit caused by an insured title defect. PA Endorsement 1570 insures the tax credits up to the amount of the owner’s policy. PA Endorsement 1580 allows for insurance coverage on top the amount of the owner’s policy to account for loss in excess of the original owner’s policy limits. For example, a developer may purchase and renovate a building which results in a fair market value and owner’s policy of $500,000, however, the value of the tax credit may exceed the amount of the owner’s policy if the credit to the investor has value over $500,000. PA Endorsement 1580, therefore, is more expensive than PA Endorsement 1570. If you have questions about available title insurance, contact a licensed title agent.
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The ABC’s of Zoning By: Sarah Yocum Rider, Esquire Before you build or change the use of a property, you should always review the property’s zoning to determine what you can and cannot do at the property and to determine whether any zoning relief is required. Practically all cities, townships and boroughs have zoning ordinances that regulate the use of properties within their municipalities. Zoning ordinances provide for different zoning districts, such as residential, commercial and industrial districts, which designate uses permitted by right and dimensional requirements for each zoning district. Municipalities also have zoning officers who interpret and enforce their zoning ordinances and zoning hearing boards that serve as quasi-judges to hear requests for uses and dimensional requirements that vary from the zoning ordinance. Provided that your proposed use is permitted by right and you meet all dimensional requirements, such as building height or parking requirements, you are free to implement your proposed use and no relief from zoning is necessary. For significant or complex projects, however, zoning relief is usually necessary. Although municipalities must include uses permitted by right in each zoning district, they may classify certain uses as special exceptions or conditional uses to provide more control over those uses. For example, a bed and breakfast use may not be permitted in a residential district but it could be allowed as a special exception (or less likely as a conditional use) in that district if certain conditions are met. How do I obtain a Special Exception? You will need to apply to, and attend a hearing before, the zoning hearing board to obtain a special exception. The board determines whether the proposed use complies with certain requirements specified in the zoning ordinance. For example, a special exception for
the bed and breakfast may require that the operator of the bed and breakfast reside at the bed and breakfast. The special exception must be granted if the use complies with those requirements, unless it can be shown that the use would be detrimental to the public health, safety or general welfare. The zoning hearing board may require additional conditions to be met to protect the public interest. How is a Conditional Use Different from a Special Exception? A conditional use is nothing more than a special exception, but rather than going before the zoning hearing board to hear the request, you would go before the municipality’s governing body, such as a Borough Council or a Board of Supervisors. Again, certain conditions must be met for conditional use approval. Conditional uses are often those uses that could have a direct impact on the lives of an entire community, such as an airport or a large shopping center. The governing body thoroughly examines the proposed use and may impose conditions to protect the community as long as the conditions are reasonably related to a valid public interest, but not related to offsite transportation or road improvements.
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What is a Variance? If the use is not permitted by right, special exception or conditional use, then a variance is required. A variance is also required if you do not meet the dimensional requirements of the zoning district, such as building setbacks or minimum lot area. These are commonly referred to as dimensional variances (as opposed to use variances). All variance applications must prove both unnecessary hardship, such as the lot size cannot accommodate certain building setbacks, as well as consistency with the public interest. The zoning hearing board may grant a variance provided that all of the following findings are made: (1) That there are unique physical circumstances or conditions, including irregularity, narrowness, or shallowness of lot size or shape, or exceptional topographical or other physical conditions peculiar to the particular property and that the unnecessary hardship is due to such conditions and not the circumstances or conditions generally created by the provisions of the zoning ordinance in the neighborhood or district in which the property is located. (2) That because of such physical circumstances or conditions, there is no possibility that the property can be developed in strict conformity with the provisions of the zoning ordinance and that the authorization of a variance is therefore necessary to enable the reasonable use of the property. (3) That such unnecessary hardship has not been created by the applicant. (4) That the variance, if authorized, will not alter the essential character of the neighborhood or district in which the property is located, nor substantially or permanently impair the appropriate use or development of adjacent property, nor be detrimental to the public welfare. (5) That the variance, if authorized, will represent the minimum variance that will afford relief and will
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represent the least modification possible of the regulation in issue. Again, the zoning hearing board may attach reasonable conditions to protect the public. The same variance criteria apply to both use and dimensional variances. However, in the case of Hertzberg v. Zoning Hearing Board of Adjustment of the City of Pittsburgh, the Pennsylvania Supreme Court announced a less stringent standard for dimensional variances. Boards may consider “multiple factors, including the economic detriment to the applicant if the variance is denied, the financial hardship created by any work necessary to bring the building into strict compliance with the zoning regulations and the characteristics of the surrounding neighborhood.� This relaxed standard makes it significantly easier to apply for and obtain dimensional variances compared to use variances. Another type of variance that arguably requires an even less stringent standard is a de minimis variance. De minimis variances are minor deviations from dimensional provisions of a zoning ordinance where rigid compliance is not necessary to protect concerns inherent in the zoning ordinance. For example, a request for a 21 foot setback compared to the required 20 foot setback would be a de minimis variance. There are no set criteria upon which de minimis variances are granted, rather, they are evaluated based on particular set of circumstances of a particular use or property. What if My Zoning Request is Denied? All zoning decisions may be appealed to the court of common pleas in the county where the property is located. All appeals must be filed within 30 days after the decision is rendered. However, appeals are costly and lengthy. Therefore, being prepared and represented by counsel at the zoning hearing stage can reduce your chances of being denied your zoning request.
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If you would prefer to receive our newsletters via email, please contact Abby Hall at ahall@barley.com or (717) 553-1059. About the Authors Sarah Yocum Rider concentrates her practice in real estate law and business law. She counsels clients on the purchase, sale, leasing and financing of residential and commercial real estate, and zoning and land development matters. (717) 399-1576 | srider@barley.com
Maria Elliott is a partner in the Real Estate and Construction groups. Her practice focuses on both real estate and construction transactions including the purchase and sale of real estate, commercial and residential leasing, zoning and land development, construction contracts and disputes, formation of entities for real estate ownership and business and real estate financing. (717) 399-1517 l melliott@barley.com Derek Dissinger is an attorney in the firm’s Finance & Creditors’ Rights and Real Estate groups. He represents creditors such as banks and credit unions in a wide range of commercial loan transactions. He is also a licensed title agent. (717) 553-1075 l ddissinger@barley.com
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