The California Department of Business Oversight has made it easier for mortgage lenders to prove compliance with regulations that limit interest charges on loan closings that take more than one day.
The DBO will accept any loan file record of written or electronic communications between the lender and the settlement agent that includes the loan disbursement date to demonstrate compliance with the state's per diem interest rule, according to a memo published earlier this month.
California is one of eight mostly Western states where mortgages are usually closed with "dry fundings," meaning loan proceeds are disbursed one or more days after contracts are signed. The per diem law prohibits lenders from charging more than one day of interest during the dry funding process.
California makes up a significant part of U.S. loan originations. Mortgages secured by California properties were 24% of the total dollar volume and 16% of all units originated in the U.S. during 2016, according to Attom Data Solutions.
Dry fundings aren't required by state law, but are a common practice in California, dating back to the days when property buyers and sellers lived far away from each other and the large cities where the banks were, explained Steve Gottheim, senior counsel for the American Land Title Association.
Lenders previously demonstrated compliance with the per diem rule using the HUD-1 settlement statement. But the TILA-RESPA integrated disclosure rules replaced that form with the new Closing Disclosure in October 2015.
Unlike the HUD-1, the TRID rules require that the Closing Disclosure be delivered to borrowers three days before closing. That makes the listed disbursement date an estimate that must be corroborated by the settlement agent's disbursement ledger or a wire transfer confirmation.
The per diem documentation must include the name of the settlement agent that provides the information and the electronic or business address used to contact the settlement agent. Also acceptable is a concurrent written or electronic statement that documents oral communications between the lender and settlement agent.
The DBO memo specifies the ALTA Settlement Statement as one form of acceptable proof. However, the settlement agent must prepare the statement and the preparation date on the form cannot be before the day the funds are disbursed.
A settlement statement that does not use the ALTA form is also acceptable proof of compliance under certain conditions. Additional proof is required if the form's preparation date is before when the funds are disbursed.
Despite the new clarity, the DBO's commissioner can still require lenders to provide additional proof of compliance, said Michael Pfeifer, a mortgage industry attorney from Orange, Calif.
"It's only acceptable evidence; it does not create a conclusive presumption [of compliance]. The Department still has the power to request additional documentation," he said. "So this new release, while in part clarifies some things, doesn't really solve the underlying problem. Even if you have the evidence, it doesn't mean your compliance is assured."
In "wet funding" transactions used in most states, all the parties come together at the same time to sign papers, and funds distributed at the closing table by the settlement agent.
With a dry funding, the borrower and seller don't have to be in the same room at the same time to sign the documents; the settlement agent disburses the loan proceeds after all the transaction's conditions are met, which could be days later.
"The individual parties do it at their own individual speed and once you've gotten everything collected together, that's when the money starts to change hands," Gottheim said.
"Part of why it continues to this day is that there is a convenience factor," he said. "You're letting people pick and choose when they sign the papers."
Consumer protection has also been cited as an advantage of dry funding. The escrow process "protects the public and minimizes the potential risk involved in any real estate transaction," a publication from California's Bureau of Real Estate stated.
Violations of the law are "low hanging fruit" and they do not take a lot of effort for the DBO examiners to find, said John Vong, president of ComplianceEase.
A pair of recent enforcement actions involved lenders headquartered in other states. In April, United Shore Financial Services of Troy, Mich. was fined $1.4 million for violating the per diem law. In entering into a settlement, the company said it did not have the documentation in its loan files to prove it was in compliance.
PrimeLending of Dallas was fined $1.6 million last November for a similar violation.