Real Estate:The Coming Disclosure Boom: Who is the Real Beneficiary?

Posted By Cliff Tuttle | November 23, 2008

By Cliff Tuttle

As though in atonement, HUD and federal regulators are beginning to announce extensive new rules under RESPA (“Real Estate Settlement Procedures Act”) and other consumer lending laws. The RESPA Rules are not going to go into effect until January 2010, reflecting the long lead time apparently needed for software producers to roll out new products.

Pennsylvania has come alive as well, with a complete revision of its mortgage banking licensing statutes, amendments to its primary consumer lending laws and its regulation of appraisal practices, to name the most significant.

These changes will overhaul the way home mortgage business is done, we hope for the better. However, consumer disclosures are based upon the premise that choices can be better informed and guided by more disclosures. As the number and size of disclosures increase, that conclusion is questionable.

There is no doubt that most disclosures given to consumers have put useful, even essential, information in front of them. But, too frequently, what is given with one hand is taken away by the other. Information made available in the residential purchase and finance process has long ago reached the saturation point.

Consider the Standard Agreement of Sale used by Pennsylvania Realtors. This lengthy and complex document usually begins the process of home purchase. The agreement itself is daunting enough. Long ago, I used to try to explain it section by section to clients, only to find that limited time and the short attention span of most humans required a severe abridgement. The Agreement itself is long enough. But on the back of about half of the pages are lengthy disclosures to the buyer in small print. If you consider the accompanying property disclosure form, completed by the seller and delivered at the same time, the agreement and disclosures are about equal in length.

The truth is that people who are about the business of making an offer to purchase real estate are, at that moment, too busy to learn and apply more than a limited amount of the information contained in these disclosures. At best, they can scan over the disclosure pages and perhaps ask a few questions.

The same principle applies to the loan application process. The borrower is focused on the details of the loan. Again, the ability of a person to aborb and evaluate new information is limited. The disclosures are relegated to the background. They are simply not as important to the borrower at that moment as the financial details of the loan.

The closing is the worst place of all to make disclosures. By that time, the terms of the sale are cast in concrete. The settlement sheet and the dollars to be allocated among the assembled parties take center stage. Since few of us (perhaps none of us) can read and absorb the dense maze of information presented by the loan documents at the closing table, a signer must be content to rely on quick verbal summaries (at best) by the closing officer. This may have been adequate in the days when closings were conducted by lawyers who knew the subject matter. But in the recent era, closings are usually conducted by non-professional notaries who often know little about the documents beyond where to sign and are increasingly being instructed by lenders to make no explanation of content whatsoever.

Moreover, the buyer in a sale may have no ability to walk the deal (or even postpone it) at that point. Thus, if a disclosure presented at the closing table actually does cause a buyer to reconsider the transaction, he or she has no power to act upon the information disclosed. The number of disclosures required by government has been greatly augmented (perhaps multiplied) by those invented by the lenders themselves. Many lender loan packages increase in size by at least a page per year.

An example of a too-late disclosure is the Coal Notice required in Pennsylvania deeds for properties in the coal-bearing regions. Grantees are required to sign a notice in constrasting color (traditionally red) that they may not be acquiring the right of subjacent support and their new home may collapse into a giant sink hole due to mine subsidence. Most Western Pennsylvanians already know about and are reconciled with the risk of mine subsidence. But there are people are actually surprised and disturbed to learn this news at the closing table. After the shock of this information passes, they quickly realize that, at this belated moment, nothing can be done. After an embarrased silence, buyers are reassured that cheap subsidence insurance is available from the State. Then, the closing rolls on and the matter is forgotten forever.

So who benefits from all of these disclosures? If the disclosures are made fully and correctly, it is primarily the party giving the disclosure. Later, when a problem arises, the buyer/borrower cannot claim that he/she was not informed of the risk. The more comprehensive the disclosure, the more effective it usually is for this purpose. One page grows to two, then five. One disclosure is replaced by two, then five. Signatures are required on every one of them. The obvious purpose is to prove that the consumer actually laid eyes on the disclosure document, however fleetingly. Some even require that the signatory certify that he or she has read and even understood it. Some documents require initials on every page. With a keystroke in a check box, the preparer of a two hundred page loan package can require initials on almost every one of the pages. I have encountered borrowers at loan closings who were physically unable to sign and initial all of the required documents in the loan package.

But there is an unintended and even less salutory consequence to this process. The consumer is kept so busy signing, over and over, page after page, that there is no time to read, think or ask a question. Consistently signing the correct full name and filling in dates may become the primary focus of this marathon exercise. And — this is the point — the more disclosures you quickly pass before those glazed-over eyes, the more effectively future avenues of attack upon the transaction can be foiled and even negative information can be slipped through. Yes, this pile of documentation, signed and initialed everywhere, effectively cuts off any future protest that the consumer wasn’t informed or didn’t understand.

True, this phenomenon has been addressed in some circumstances by rights to rescind, advance disclosure and the like. But there is still far too much information overload at decision points and far too little opportunity for the recipient to do anything about it. Each new wave of consumer disclosures simply makes the conundrum worse.

Solutions? The only meaningful road to true disclosure is pre-education of consumers. Blogs like this one can provide thought-provoking information to consumers well in advance of transactional decisions. Then, the consumer can be familiar enough with the basics that the data presented later can be understood and inform a choice.

One primary mission of this blog is to de-mystify and explain information likely to be encountered in the heat of a real estate or other consumer transaction. Read Pittsburgh Legal Back Talk in the coming year to get a handle on the perplexing new disclosures that will be eminating from Washington and Harrisburg. Then, go concentrate on the deal.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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