[spowell]

We had some questions about our internal process for handling purchase transactions using equity in another property currently existing as their primary residence.

We had a situation with two loans recently, a short-term bridge loan and another 30 year permanent financed purchase transaction. Both transaction used equity in an additional home, already serving as their primary residence as collateral. We have a few questions in regards to the closing of the purchase transaction with the attorney.

As you are well aware, the use of their current primary residence as collateral triggers Right of Rescission. On both transactions, this was honored correctly. The customers came into our bank and closed their loan with us, waited the 3 days and then proceeded to close the purchase transaction in the attorney’s office and actually complete the purchase of the new home.

I know that Right of Rescission was required and honored correctly on both of these transactions, it’s the double closings that has us held up and questioning procedure. Since this was a purchase transaction, per KY state law, a purchase transaction must close with a licensed attorney. This too was honored correctly, as an attorney filed all of the title work 3-days post the loan closing in the bank. My question is, must the attorney be present for the closing of the purchase loan OR does he simply have to be present at the closing table with the sellers, in which they’ll have the funding check from our in-house closing 3 days prior? Or does the attorney need to be present to close our purchase loan transaction as well? We currently pay the attorneys to conduct the closings and have for many years, so I’m trying to pin this requirement back to compliance or KY state law in order to enhance our procedures.

The reason we feel as if this is an issue (and this is ONLY an issue on transactions using their current primary residence as additional collateral), but the way this is closing doesn’t allow the settlement statement and the closing disclosure dates to match. Our closing disclosure will be dated 3 days prior to the settlement statement provided by the attorney (as that is when the purchase is actually closing). Our lender is calling this consummation vs settlement. He believes our in-house closing is a “soft close” and finalizing consummation of the loan transaction; whereas the “hard closing” is what he is referring to his settlement with the attorney. With regular purchase transactions, taking the house to be purchased as collateral, this isn’t an issue. We close both the loan documents and settle with the attorney at the same closing table. The lender states that we would never show up to an attorney closing table and not be able to disburse the funds to the sellers immediately, which I can understand. However, from a legal point of view – we are operating under the interpretation of KBA regulations stating that an attorney or third party must be present to conduct a real estate purchase closing. By closing the loan in-house, without a third party representative or attorney present, is that a violation?

Hopefully this question makes sense and you can give us some clear guidance as to how to handle these types of transactions going forward.

Topic

[jholzknecht]

In Kentucky, the issue is whether a bank that closes a mortgage loan without the involvement of an attorney is engaging in the unlicensed practice of law. Many lenders have worked out an arrangement with their attorney’s that the attorney need not be physically present at the closing, so long as the closing is in fact conducted under his/her supervision and control, but the responsible attorney must be familiar with the documentation and be available at the time of closing for consultation.

It is appropriate that your closing disclosure is dated three business-days prior to closing, as required by the Federal Truth in Lending Act. Federal law does not require a settlement statement separate from the closing disclosure. If the party conducting settlement uses a separate settlement statement they decide what date and content to include. Care should be taken to assure that the content on the separate settlement statement and the content of the required closing disclosure are consistent. Differences between the two document could result in an UDAP violation, since the conflicting numbers could be unfair or deceptive.

[dbishop@peoples.bank]

Follow up question – since you are taking both properties, is it okay to use the new purchased property as collateral even though they will not technically own the property until 3 days later?

[dbishop@peoples.bank]

I should have also added – do you date your loan documents the date of closing and funding is delayed? or do you date you loan docs 3 days before closing date, so funding happens on closing date. I feel like the second option is a little weird as you are taking a mortgage on a property that the borrower does not own yet.

[Kimberly Boatwright, CAMS, CRCM]

@dbishop quick question are you also in KY, since the original post and answer had State specific questions?

first question – yes you can take both properties as collateral. But you must follow Reg Z ROR rules for the transaction since you are taking collateral on the primary.

As far as your 2nd question for ROR in Reg Z. you date your docs the day of closing and funding is delayed until the 3 days have passed.

[Author]

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