New Loan Deadlines

LEGAL UPDATE

Scott Peterson General Counsel for the Colorado Association of REALTORS®

NEW LOAN DEADLINES

It is a triennial ritual for the very most diligent of Colorado REALTORS®.

Like the fervent anticipation of a child on Christmas Eve, the drooling gaze of a dog awaiting a treat, the excited trepidation as the roller coaster attendant confirms that you are locked into the ride, and your anxious pause as you open the front door to your in-laws on Thanksgiving Day… on tenterhooks, Colorado REALTORS® await the triennial delivery of the Colorado Real Estate Commission approved contracts. Well, friends, your wait is over. The 2022 revisions to the Commission approved contacts are available now. (BUT NOT FOR USE UNTIL January 1, 2022!)

For those of you who have not already downloaded the redlines, I would encourage you to do so using the link above. It is the best way to visually see each of the individual changes that have been incorporated into the new Contract to Buy/Sell (CBS) forms. Moreover, I would encourage each of you to take a comprehensive contract update course BEFORE THE NEW YEAR. Once the clock strikes midnight on January 1, you will be required to use the new forms immediately. Well, after your New Year’s hangover wears off, of course.

As you may imagine, there are loads of changes to the new CBS forms. Some of the changes are what I would describe as “non-substantive” (clerical, clean-up, punctuation, etc.) but there are also a variety of important “substantive” changes. In the interest of calling out my FAVORITE contract modification for 2022, I wanted to discuss the important, exciting, and substantive modification to Paragraph 5 of the new CBS:

PARAGRAPH 5 – FINANCING

In the current version of the CBS, Paragraph 5.2 is entitled “New Loan Review” and it provides the Buyer with the ability to terminate the contract if the New Loan is not acceptable to the Buyer (in their sole subjective discretion) based on the loan’s “availability, payments, interest rate, terms, conditions and cost…”. As such, the loan’s objective “availability” (the lender’s approval of the loan/buyer/property) is tied to the Buyer’s consideration and satisfaction with the loan’s “payments, interest rate, terms, conditions and cost” (the loan terms).

Because of the loan “availability” (lender approval) component, the “New Loan Review” deadline is commonly the final contingency the Buyer has to terminate the contract and is typically very close to the Closing Date. Based on the “sole subjective” rights that a Buyer has to terminate for “New Loan Review,” it opens the door for the use of the contingency by the Buyer to get out of the contract very late in the transaction. In other words, as the contact is currently written, a Buyer could terminate at the New Loan Review deadline by saying they

Much Awaited: •Holiday House Guests •CREC Approved Contracts

are no longer comfortable with the interest rate or monthly payments (in their sole, subjective discretion) and the Seller is in a difficult position to refute the Buyer’s termination. In my opinion, the broad and subjective nature of this contingency has led to a Seller being unfairly penalized by a Buyer’s late, bad faith termination. Particularly since, in most cases, the Buyer knows their interest rate and monthly payment VERY early in the transaction.

In the new, 2022 CBS, Paragraph 5.2 will be splitting loan “availability” (lender approval) away from the buyer’s “subjective” approval of the new loan’s “terms” (payment, rate, conditions, costs, etc.). To accomplish this, the CBS will now have two different dates & deadlines under “New Loan” –Paragraph 5.2.1 (“New Loan TERMS”) and Paragraph 5.2.2 (“New Loan AVAILABILITY”).

NEW LOAN TERMS

On or before the “New Loan Terms” deadline, the Buyer will be forced to consider whether the new loan’s proposed terms (the loan’s “payments, interest rate, conditions, and costs or any other loan terms”) are subjectively acceptable to the Buyer. As contemplated, this deadline will likely be set MUCH earlier in the contract than the current loan deadline.

Based on federal lending (TRID) requirements, a lender is compelled to generate a Loan Estimate (LE) document within days of a prospective borrower submitting a loan application. The LE document is expected to essentially “mirror” the final, mandatory Closing Disclosure (CD) document that is generated 3+ days prior to Closing. Therefore, a Buyer should have a very clear understanding of their complete loan “terms” shortly after making Loan Application. As such, within days of receiving their LE document, a Buyer will be able to waive their subjective contingencies related to the loan terms and commit to moving forward based on the loan’s specific terms.

NEW LOAN AVAILABILITY

The remaining loan deadline (“New Loan Availability”) will be reserved for the lender’s underwriting and approval process of the Buyer for the new loan. Based on the time frame legitimately required for the underwriting process (appraisal, income verifications, credit worthiness, etc.), the New Loan Availability deadline will likely be the last contingency in most contracts. Unlike the current contract’s loan deadline, however, the Buyer’s subjective consideration of the new loan’s terms will no longer be a basis for their termination so late in the contract period.

WHY?

In my view, this modification to the loan contingencies has been a long time coming. One of the most common complaints I receive on the CAR Legal Hotline is from listing agents regarding a buyers very late termination of the contract based on the “loan contingency.” In many cases, the loan is “available” to the buyer but, in their sole, subjective discretion, one of the loan’s terms are allegedly unacceptable to the buyer. The seller and listing broker are understandably frustrated and feel that the buyer’s termination based on “loan” is being used in bad faith, but due to the explicit subjectivity of the current deadline, it is very difficult to challenge the termination’s legitimacy. The New Loan Terms deadline will allow sellers to demand an earlier date for the buyers to make their subjective decisions regarding the loan and seems more reasonable to sellers.

I hope everyone has a fantastic Holiday season and avoids the dreaded sigh before opening the front door to Thanksgiving Day guests!