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ADRE Commissioner Shares Most Common Compliance Findings
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Letters of Intent: Signers Beware
This article originally published on the Corporate Law Insider blog of Bourque Law Firm, P.C. Reprinted with permission, all rights reserved.
Letters of intent can be a useful tool when entering into negotiations to buy or sell a business or property. However, many people who sign letters of intent have no idea that they may be creating a binding contract upon which they can be sued if things don’t work out.
This Corporate Law Insider edition provides businesses and individuals with guidance in handling letters of intent, memorandums of understanding, and similarly labeled documents.
If you do not want to be bound, it had better say that clearly in anything you sign
Many people believe that a document entitled “letter of intent” cannot be a binding contract. Such a belief is mistaken.
If a party does not wish to be bound, it should include clear and unmistakable language in whatever it signs stating that nothing is intended to create a contract or obligation between the parties. There is no such thing as overkill when including such language, which can and should be repeated for emphasis.
Conversely, if a letter of intent fails to contain clear non-binding language, but instead contains language where parties discuss an “agreement” or state that they shall be “obligated” to do something, they may very well have entered into a binding contract. Words such as “accept,” “offer,” “agree,” or “contract” similarly imply that a potential binding obligation (i.e. contract) exists.
ANY language implying or identifying an obligation or duty on behalf of a party can create a fact issue as to whether an agreement has in fact been reached. The scope of the contract will depend on the wording in the letter of intent and the surrounding circumstances. Thus, one should carefully read all letters of intent, memorandums of understanding, and other documents before signing them.
Language regarding “Negotiating in good faith”
When parties state that they “shall negotiate in good faith,” they may well have bound themselves contractually to do just that — even if there is other non-binding language in their document. As an Arizona court noted:
“[I]n certain circumstances an agreement to negotiate in good faith [can] be a valid contract where there is express language that conveys as much. In Rennick v. O.P. T.I.O.N. Care Inc., an agreement containing a non-binding clause was found to contain a contract to negotiate in good faith where the express language of the agreement obligated the parties. The agreement contained the language that the parties agreed to “continue good faith discussion directed toward the creation of formal written contract that, upon approval by the board of Director [sic] of each party, will be executed to establish the following arrangements.” Therefore, an otherwise non-binding agreement could create an obligation to negotiate in good faith where the parties included such language.”
Parties should also beware of language which allows the parties to “terminate” negotiations only after a period of time or after a particular event. Such language implies that there is no general right to terminate negotiations. Thus, I encourage clients who do not wish to be bound to negotiate to include the following language in their LOIs: “Any party to this letter of intent may terminate negotiations at any time for any reason.”
Where a contract to negotiate in good faith is proven, the measure of damages is typically those suffered in relying on the defendant to negotiate in good faith. This can include the plaintiff’s out-of-pocket costs in conducting the negotiations, which can be substantial if negotiations extend over a significant period of time and entail significant due diligence and other work.
I have litigated letter of intent disputes and they are not pretty. Battling in court over one’s business or property is painful and expensive. Risks and emotions run high when relationships go wrong.
So, the next time you see a letter of intent with any potentially binding language, do not sign it unless you wish to be bound. Instead, contact counsel to revise the document or, alternatively, scrap it and create an appropriate letter of intent that suits your needs given the particular potential transaction.
Art Borque, Esq., is an AV rated attorney with 24 years of experience. His Phoenix, Arizona, practice deals with Employment and Labor Law, Commercial and Tort Litigation, and Dispute Resolution.
TILA-RESPA Integrated Disclosure rule changes to AAR forms
Reviewed May 2016
By Martha Appel, 2015 Arizona Association of REALTORS® Risk Management Committee Chair
The Consumer Financial Protection Bureau (CFPB) published the TILA-RESPA Integrated Disclosure rule (TRID) which combines and replaces disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The effective date for TRID is now October 3, 2015.
As Chair of the workgroup charged with implementing the TRID compliant changes, it is my pleasure to inform you that the Arizona Association of REALTORS® has revised four forms to ensure their compliance with the new rule. Those forms are: (1) Pre-Qualification Form; (2) Loan Status Update; (3) Residential Resale Real Estate Purchase Contract; and (4) Vacant Land/Lot Purchase Contract. The revised forms will be released in mid to late September.
Highlighted below are the major TRID related changes to each of the forms.
The Pre-Qualification Form is now required to be submitted in conjunction with the Residential Resale Real Estate Purchase Contract (Contract) at the time of offer. If a buyer has not consulted with a lender when submitting a Contract, the buyer should simply check the box at line 3 and complete only lines 4-5.
Loan Status Update (LSU)
The initial LSU must be delivered within “ten (10) days after Contract acceptance” instead of “five (5)” days. The reason for this is because TRID requires that a Loan Estimate must be completed by the lender and provided to the borrower three days after the borrower provides to the lender six pieces of information (loan application). And, because lenders have to abide by this timeframe, providing the LSU within five days of contract acceptance would prove very difficult.
Because of the new TRID requirements, page 2 of the LSU now identifies additional steps in the lending process. Those steps include the following: (1) the lender receiving the six loan application pieces of information from the buyer; (2) the lender sending the buyer the Loan Estimate; (3) the buyer indicating to the lender an intent to proceed with that lender; (4) the lender providing a Closing Disclosure to the buyer; and (5) the buyer’s receipt of the Closing Disclosure from the lender.
Residential Resale Real Estate Purchase Contract
As stated above, Section 2a now requires the Pre-Qualification Form to be submitted in conjunction with the Contract at the time of offer.
Section 2b now provides that, three days prior to close of escrow the Buyer must either: (i) sign all loan documents; or (ii) deliver to Seller or Escrow Company notice of loan approval without PTD conditions AND date(s) of receipt of Closing Disclosure(s) from Lender; or (iii) deliver to Seller or Escrow Company notice of inability to obtain loan approval without PTD conditions. The reason (ii) was added is because if the loan documents are not to the escrow company three days prior to the close of escrow, (ii) gives the Seller written assurance by the Buyer that their loan has been approved without PTD conditions, a Closing Disclosure has been issued and the loan documents are expected to be delivered and signed by the Buyer by the close of escrow date.
Additionally, section 2f requires the buyer to provide the lender with the “Buyer’s name, income, social security number, Premises address, estimate of value of the Premises, and mortgage loan amount sought” within three days after Contract acceptance. The reason for this is because the above information (loan application) triggers TRID timelines and assures the seller that the buyer is moving forward with their financing.
Finally, on page 9 of the Contract, lines have been included for: (1) each salesperson’s state license number; and (2) each firm’s state license number. These changes were made because the new Closing Disclosure requires the state license number of the agents and their respective brokerage.
Vacant Land/Lot Purchase Contract
The Pre-Qualification Form is only required with the Vacant Land/Lot Purchase Contract if the buyer is using “Conventional, FHA, VA, or USDA financing.” Additionally, as is now the case with the Contract, an LSU must be submitted within ten (10) days after Contract acceptance.
For more information on the changes to the forms, please see the FAQs.
Revised TILA-RESPA Compliance Forms FAQs and Sample Forms
Frequently Asked Questions
In September 2015, the Arizona Association of REALTORS® will release revised versions of the following four forms: (1) Pre-Qualification Form; (2) Loan Status Update; (3) Residential Resale Real Estate Purchase Contract; and (4) Vacant Land/Lot Purchase Contract. To better understand the changes made to these forms, the reason for the changes, and how the revised forms should be utilized, below are frequently asked questions (FAQs) followed by answers and pertinent analysis. Please read these FAQs carefully before viewing the sample forms below.
Q1. Why were these forms revised?
A1. The Consumer Financial Protection Bureau (CFPB) is implementing revised rules and forms that combine disclosures consumers receive in connection with applying for and closing on a mortgage loan. To ensure that AAR’s forms comply with these rules and follow the new timelines, revisions were required.
Q2. In revising the Residential Resale Real Estate Purchase Contract and the Vacant Land/Lot Purchase Contract, were any changes made that are unrelated to the new TILA-RESPA Integrated Disclosure (TRID) rules imposed by the CFPB?
A2. No. At this time, the only changes made to these two contracts are those necessitated by the new TRID rules.
Q3. When do I need to start using these new forms?
A3. The new forms should be used in conjunction with transactions in which the lender receives a loan application on or after October 3, 2015.
Q4. Line 54 of the Residential Resale Real Estate Purchase Contract now requires that an AAR Pre-Qualification Form be attached to the Contract. What should the buyer do if they have not yet obtained a Pre-Qualification form, but nonetheless wish to submit a purchase offer?
A4. Under these circumstances, the buyer should indicate on line three of the Pre-Qualification Form that “Buyer HAS NOT consulted with a lender.” The buyer should then print their name on line four and sign and date on line five. If the box on line three is marked, the buyer does not complete lines six through 42 of the Pre-Qualification Form.
Q5. When must the buyer first deliver to seller a completed Loan Status Update?
A5. As evidenced by Section 2e of the Residential Resale Real Estate Purchase Contract, an initial Loan Status Update must be delivered to the seller “within ten days after Contract acceptance.” This is a change from the prior Residential Resale Real Estate Purchase Contract, which required initial delivery of the Loan Status Update within five days after Contract acceptance.
Q6. What should a buyer do if their lender refuses to complete a Loan Status Update?
A6. As is currently the case, the buyer should complete, at a minimum, lines 1-40 of the Loan Status Update. The failure of the buyer’s lender to complete the Loan Status Update is not a potential breach and, therefore, not subject to a cure period notice because the lender is not a party to the Contract.
Q7. Line 39 of the Loan Status Update states “Buyer commits to work with the above referenced Lender on the terms described herein.” Is the term “commits to work with” synonymous with the term “intends to proceed” as used in 12 CFR §1026.19?
A7. No. Intends to proceed is a defined term of art by which a borrower communicates to the lender that they choose to proceed with the loan transaction after having received the Loan Estimate. A buyer can therefore commit to work with a lender via the Loan Status Update and not yet have given formal notice of intent to proceed. If that is the case, the buyer would sign on line 40 of the Loan Status Update, but the box on line 45 would be marked “NO” as that line asks if the “Buyer indicated to Lender an intent to proceed with the transaction after having received the Loan Estimate.”
Q8. Section 2f of the Residential Resale Real Estate Purchase Contract now requires the buyer, “within three days after Contract acceptance,” to provide the lender with “Buyer’s name, income, social security number, Premises address, estimate of value of the Premises, and mortgage loan amount sought.” Why was this requirement inserted?
A8. The CFPB has defined a loan application as the borrower’s submission to the lender of the above-referenced six pieces of information. Submission of the loan application triggers the lender’s delivery of the Loan Estimate to the borrower, thereby beginning the timeline that will be followed through close of escrow. To ensure a timely closing, it is important that the timeline commence as early as possible, and for that reason, the borrower is now required to submit these six pieces of information to the lender within three days after Contract acceptance.
Q9. As part of their Loan Application, the borrower is required to provide the lender with an “estimate of value of the Premises,” in addition to five other pieces of information. What does “estimate of value of the Premises” mean?
A9. The estimate of value of the Premises will typically be the contract price.
Q10. What action must the buyer take three days prior to close of escrow?
A10. Three days prior to close of escrow the Buyer must either: (i) sign all loan documents; or (ii) deliver to Seller or Escrow Company notice of loan approval without PTD conditions AND date(s) of receipt of Closing Disclosure(s) from Lender; or (iii) deliver to Seller or Escrow Company notice of inability to obtain loan approval without PTD conditions. See Section 2b of the Residential Resale Real Estate Purchase Contract.
Q11. Why is it important for the seller to know the date(s) on which the buyer received the Closing Disclosure(s) from their lender?
A11. This information is important to the seller because it will help the seller understand when the transaction may close escrow. More specifically, the loan cannot be consummated (i.e. – execution of the promissory note and deed of trust) less than three business days after the Closing Disclosure is received by the buyer.
Q12. What changes were made to page nine of the Residential Resale Real Estate Purchase Contract and page ten of the Vacant Land/Lot Purchase Contract? Why were these changes made?
A12. The last page of these two contracts now require the agent’s state license number and the brokerage’s state license number. Page five of the new Closing Disclosure contains a section titled “Contact Information.” Within that section, the lender must enter the “State License ID” for the real estate agent and the “State License ID” for their Brokerage. This is a new requirement as this information did not appear on the HUD-1. By identifying these license numbers in the Contract, it will ensure that the lender is in possession of the information needed to properly complete the Closing Disclosure.
Q13. Lines 397 and 409 of the Residential Resale Real Estate Purchase Contract ask for the “Firm Address.” If the agent works out of a branch location and not the corporate headquarters, which address should be entered?
A13. The address listed should be “the identified person’s place of business where the primary contact for the transaction is located (usually the local office) rather than a general corporate headquarters address.”
Sample Forms (changes highlighted in yellow)
To be used only in conjunction with transactions in which the lender receives a loan application after October 3, 2015.
Don’t Add Confusion to an Addendum
The purpose of an addendum is to include additional terms and conditions to a contract. More specifically, an addendum may accomplish the following: (1) provide further explanation to the terms in the contract; (2) modify existing terms in the contract; or (3) present new considerations to the contract.
While an addendum should only affect those items addressed in the addendum, an ambiguous addendum may lead to a variety of problems such as creating loopholes or unintended consequences. Additionally, a poorly drafted addendum may fail to take into consideration other issues surrounding the new or modified terms. These problems may lead to potential liability for the drafter. Accordingly, real estate agents should strive to clearly and concisely draft addendums.
Drafting an Addendum
If an addendum is properly drafted, the parties’ rights and obligations are clear to anyone that reads the addendum. Put differently, the addendum does not create questions as to what the parties intend to occur. As a result, this enables agents to manage their clients’ expectations and the transaction to progress smoothly.
When drafting an addendum make sure to do the following:
- Refer the addendum back to the original contract and specify the effective date of the addendum;
- Confirm the new verbiage does not already exist in the contract as adding verbiage will supersede the pre-printed portion of the contract;
- Be as specific as possible by referencing parts of the contract that are changing, what the changes are and when the changes are to occur (if necessary); and
- Make sure all parties sign the addendum.
Good practices for drafting addendums are:
- Have a third-party read the addendum to see if they understand what the parties are agreeing to;
- Look for loopholes – read the addendum as if you are on the other side and trying to get out of the contract;
- If there are multiple addenda, re-draft the addenda into one addendum; and
- Consider consulting an attorney.
AAR Offers Pre-Printed Addendums
Don’t reinvent the wheel! AAR offers addendums that address many different incidents in a transaction. One addendum that addresses many common transactional occurrences is the Additional Clause Addendum (ACA). More specifically, the ACA considers the following: (1) back-up contracts; (2) signature of absent buyer; (3) relocation; (4) cash sale; (5) non-refundable earnest money; (6) appraisal waiver; (7) surveyed property; (8) tax-deferred exchange; and (9) water rights. Because these are common occurrences, a real estate agent does not need to draft an addendum. Rather, the agent can use the pre-printed form which thereby lessens the agent’s chances of drafting an ambiguous addendum.
Alternatively, if the real estate agent does not want to use the ACA in its entirety, the agent can utilize that portion of the ACA that is specific to their transaction by lifting the verbiage from the ACA and drafting it into a separate addendum. Not only can this same technique be used with the ACA, but it can also be used with verbiage from other pre-printed AAR addendums. However, the agent should be cautious to make sure the agent is utilizing the verbiage correctly and may want to have their broker review the verbiage before the addendum is signed by the parties.
All Interested Parties Should Receive a Copy
Addendums are invaluable if properly drafted/used and submitted to the appropriate parties. In determining who the appropriate parties are, you should consider who the interested parties are by who the addendum directly affects. For the most part, the interested parties tend to be the buyer, seller and their agents, the Title Company, escrow, the lender (if any) and appraiser. Because these parties are usually directly involved in the transaction, they should receive a copy of any addenda incorporated into the contract.
About the author: Nikki J. Salgat, Esq. is associate counsel to the Arizona Association of REALTORS®. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.
Hackers Perpetrate Wire Transfer Fraud Scams Across Arizona
According to REALTORS® and title companies across the state, Arizona real estate transactions are once again being targeted by hackers perpetrating wire transfer fraud.
It is customary for parties in a real estate transaction to receive, and comply with, wire transfer instructions. Unfortunately, it has become increasingly common that those instructions were not generated by a legitimate party, and that the funds are being wired to a bank account controlled by an online hacker.
Although the scam is perpetrated in a variety of ways, it typically begins with the email account of a party to a pending real estate transaction being hacked. The hacker then identifies specific details regarding the transaction, such as sales price, the parties’ names and contact information, identity of the lender, name of the escrow officer, close of escrow date, and escrow number. Upon ascertaining this information, the hacker begins directly emailing the buyer or lender making it appear as though the email was sent by the real estate agent or title company. These fraudulent emails contain instructions to wire the closing funds into a bank account controlled by the hacker. In one incident that recently occurred in Southern Arizona, the hacker went so far as to generate a bogus electronic signature authorizing the funds to be wired to an account belonging to the hacker. Once the money is wired as instructed, it is immediately withdrawn by the hacker and gone for good.
To combat this scheme, REALTORS® and their clients should remain vigilant and verify all emails that convey wire instructions for disbursal of funds from escrow. Fortunately, many title companies are now unwilling to accept an email from a customer containing wiring instructions without calling the customer to verify the information.
And while a myriad of technical precautions can be taken, such as the use of encrypted emails, perhaps the best advice comes via an alert issued by the Silicon Valley Association of REALTORS®, stating:
“Buyers and sellers should confirm all email wiring instructions directly with the escrow officer by calling the escrow officer on the telephone. In that conversation, the correct account number information should be repeated verbally before taking any steps to have the funds transferred.”
If you or your client believe that you are being targeted in a scam of this nature, immediately notify the title company and do not hesitate to contact the authorities.
Interview with ADRE Commissioner Judy Lowe: Part Three
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Close of Escrow Changes, October 3, 2015 – FAQs
The Consumer Financial Protection Bureau has published revised final rules and forms that combine disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
The new forms include a Loan Estimate and a Closing Disclosure. The Loan Estimate replaces the Truth in Lending statement and Good Faith Estimate, and it must be provided within three business days of a lender’s receipt of a mortgage loan application. The three-page document includes terms and estimated costs that consumers can use to comparison shop. The new five-page Closing Disclosure provides detailed information on all costs associated with the loan. This form must be given to borrowers three business days before loan consummation, and it replaces the HUD-1 Settlement Statement.
The effective date for the new TILA-RESPA Integrated Disclosure rules is now just months away. As REALTORS® begin preparations for implementation of the new rules, a number of excellent questions have been posed to Arizona Association of REALTORS® staff. Below are some the most frequently asked questions, along with answers and pertinent analysis.
Q: I heard that the effective date for the new closing procedures is October 3, 2015. If my clients are closing escrow after October 3rd, does that mean they will use the new Closing Disclosure form and not the HUD-1 Settlement Statement?
Not necessarily. For transactions in which the lender receives a loan application prior to October 3rd, the HUD-1 Settlement Statement will still be used at close of escrow, even if the closing takes place after October 3rd. Stated differently, the Closing Disclosure form will be used only for those transaction in which the lender receives the loan application after October 3rd.
Q: Will my buyer be able to submit a completed loan application to their lender before identifying a specific property?
No. As of October 3, 2015, a loan application must contain all of the following six pieces of information: 1. The consumer’s name; 2. The consumer’s income; 3. The consumer’s social security number; 4. The property address; 5. An estimate of the value of the property; and 6. the mortgage loan amount sought. Therefore, a loan application cannot be complete without the identification of a property address.
Q: What does the lender have to do after receiving a loan application?
The lender is responsible for ensuring that it delivers or places in the mail the Loan Estimate form no later than the third business day after receiving the consumer’s application for a mortgage loan.
Q: What is the Loan Estimate?
The Loan Estimate, which replaces the current Good Faith Estimate and the current Truth in Lending Disclosure, presents the costs and risks of the potential loan using plain language and in a simplified format. The interest rates, monthly payment, loan amount and closing costs are clearly spelled out on the first page. On the remaining two pages, the form offers information about taxes, insurance, and other costs. The form also clearly identifies loan features some consumers might want to avoid such as a prepayment penalty, a balloon payment, or a potential increase in the loan balance after close of escrow.
Q: If the Loan Estimate meets with the buyer’s approval and they want to continue with the loan transaction, what do they need to do?
Under such circumstances, the buyer must affirmatively indicate an “intent to proceed” with the loan transaction. Unless a particular manner of communication is required by the lender, this may include: 1. Oral communication in person; 2. Oral communication over the phone; 3. Written communication via email; or 4. Signing a pre-printed form. The buyer’s silence is not indicative of intent to proceed, which can only be conveyed after the buyer’s receipt of the Loan Estimate.
Q: Does the buyer’s execution of the Loan Estimate qualify as their “intent to proceed” with the loan transaction?
No. When the buyer signs page three of the Loan Estimate, they are only confirming receipt of the form. The buyer’s signature on the form does not evidence their “intent to proceed.”
Q: What does “consummation” mean? Is it the same as close of escrow? Why is this term important?
Consummation is defined as the time that a consumer becomes contractually obligated to the lender on the loan, i.e. – execution of the promissory note and deed of trust. Consummation is not the same as close of escrow, which the Residential Resale Real Estate Purchase Contract defines as the time when the deed is recorded at the appropriate county recorder’s office. The reason this term is important is because the buyer must receive the Closing Disclosure form no later than three business days before they can consummate the loan.
Q: I know that the loan cannot be consummated less than three business days after the Closing Disclosure form is received by the buyer. But can’t the borrower just waive this three-day waiting period?
Although the technical answer to this question is “yes,” obtaining such a waiver will likely prove exceptionally difficult. In order to waive or modify the three-day waiting period, the consumer must establish a “bona fide personal emergency.” Under these circumstances, the consumer must provide the lender with a dated written statement that describes the emergency, requests a waiver of the waiting period, and is signed by all of the consumers who are primarily liable for the loan payments. The creditor is prohibited from providing the buyer with a pre-printed waiver form and it is expected that lenders will be extremely reluctant to approve any waiver of the three-day waiting period.
For more information on what to expect come October 3rd, go to: http://files.consumerfinance.gov/f/201311_cfpb_tila-respa_detailed-summary.pdf. Please note: if page doesn’t appear, check your “Downloads” folder for the file.
About the Author: Scott M. Drucker, Esq., a licensed Arizona attorney, is General Counsel for the Arizona Association of REALTORS® serving as the primary legal advisor to the association. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.
Interview with ADRE Commissioner Judy Lowe: Part Two
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