This article falls into the category of “how the sausage gets made.”
As a real estate agent, do you ever wonder why on certain transactions the broker commission check is received right away and on others, it is not? There are any number of reasons why this may be the case, one of which may be the funding authorization.
It has historically been the case that lenders fund transactions by sending the loan monies needed for closing to the settlement agent. In fact, Virginia Code § 55-525.10, entitled “Duty of lender”, states in relevant part, “[t]he lender shall, at or before loan closing, cause disbursement of loan funds to the settlement agent.” The next section, Virginia Code § 55-525.11, entitled “Duty of settlement agent”, states in relevant part, “[t]he settlement agent shall cause recordation of the deed, the deed of trust, or mortgage, or other documents required to be recorded and shall cause disbursement of settlement proceeds within two business days of settlement.”
A relatively new procedural requirement may play a role in the delay of recordation and disbursement. For the last several years, a number of lenders require settlement agents to receive funding authorization in order to record and disburse transactions. Specifically, the lender requires that the settlement agent send certain documentation back to the lender after closing in order to receive funding authorization. Here are some examples of language from lender loan instructions relating to funding authorization:
We require a funding number to be issued prior to disbursement. Please execute the following documents first and send to . . .
Documents required prior to funding. A funding number will be issued on receipt/approval of these required completed documents.
Requested documents typically include the note, deed of trust, and closing disclosure among others.
“Settlement”, as defined by Virginia Code 55-525.8, “means the time when the settlement agent has received the duly executed deed, loan funds, loan documents, and other documents and funds required to carry out the terms of the contract between the parties and the settlement agent reasonably determines that prerecordation conditions of such contracts have been satisfied.”
So in the past, if the settlement agent had all the money in its escrow account and all the required documents signed, then settlement had occurred and the transaction could be recorded and disbursed. However, with the introduction of funding authorizations, without a funding number from the lender, it is as if the settlement agent does not have the loan funds. A settlement agent, rather than going straight to recordation and disbursement, must send documents back to the lender and wait for review and approval before recording and disbursing the transaction. This is one more step in the process of completing a settlement and it should not come as a shock that if a closing takes place during the end of the month (which is when up to 35-40% of all monthly transaction volume closes), it will likely take longer for any given lender to review the required documents from settlement and provide the funding number needed by the settlement agent to record and disburse the transaction.