KNOW BEFORE YOU OWE
The aftermath of the financial and housing crises brought about new regulatory reforms to help prevent a re-occurrence. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 in direct response to the crisis and covered a variety of lending and financial reforms. It also created the Consumer Financial Protection Bureau (“CFPB”), a federal agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. Effective October 3, 2015, the CFPB issued a new rule that combines mortgage disclosures previously established by the Truth-in-Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”) into a single rule known as the TILA-RESPA Disclosure Rule or “TRID”.
Q: What does it mean for the consumer?
A: Mortgages are complex and confusing. The TRID disclosure rule is designed to empower consumers with the information they need to make informed mortgage choices. In other words, it helps the borrower comparison shop for mortgages and avoids surprises at the closing table.
Q: What transactions does TRID apply to?
A: The new TRID rules applies to most closed-end consumer mortgage loans that are secured by a one to four unit dwelling attached to real property. It does not apply to home-equity lines of credit, reverse mortgage loans, mortgage loans secured by a mobile home or by a dwelling not attached to real property, such as land, or to creditors that write five (5) or fewer mortgages per year. A partial exemption is given to certain junior liens that are associated with housing assistance loans for low/moderate income consumers. Unlike many of the CFPB mortgage rules, TRID does not include an exception for small creditors.
Q: What has changed?
A: TRID combined the preliminary Truth in Lending (“TIL”) disclosure, the final TIL disclosure, the loan servicing disclosure, the Good Faith Estimate (“GFE”) and the HUD-1 Settlement Statement into just two (2) forms.
Q: What are the two new forms?
A: The two new forms are the Loan Estimate (“LE”) and the Closing Disclosure (“CD”).
Q: What is the Loan Estimate?
A: A lender is now required to provide a borrower the LE no later than the third business day after receiving the consumer’s application. The LE provides information about the interest rate, monthly payments, property tax and insurance escrows, closing costs, and the like. An application is deemed submitted when a consumer provides their (1) name; (2) monthly income; (3) social security number; (4) property address; (5) estimated value of property; and (6) requested loan amount. A lender may add additional requirements for a credit decision, but not for providing the LE. Notably, removed from the original definition of “application” was the all-encompassing seventh provision providing for “any other information deemed necessary by the loan originator.”
Q: Can the consumer shop around after receiving the LE?
A: Yes. A consumer may compare the terms on all the LE forms they received from different lenders to determine which loan is the best fit for them. Once a consumer has decided, they must notify the chosen lender that they intend to move forward with the loan.
Q: What happens when the borrower notifies the lender to proceed with the loan?
A: At that point the lender will begin the official loan approval process, obtain a real estate appraisal and order a property title examination (in New York title examination is initiated by the buyer’s attorney and the results are turned over to the lender’s attorney).
Q: What is the Closing Disclosure form?
A: The CD provides the borrower with all the final figures and amounts needed for closing, important contact information for the lender and service providers, the interest rate, monthly principal and interest, origination charges and a calculation of the cash needed to close. The lender must provide the CD at least three (3) days prior to closing.
Q: Must the CD figures match those in the original LE?
A: Generally, yes. The lender cannot change certain loan charges, such as the origination fee, the appraisal fee, the credit report fee, or fees for services the borrower could not shop for. Charges for escrows of real estate taxes and insurance, credits from seller and additional items discovered during a property inspection or walk-through can change as long as the borrower received an updated CD before closing. A lender must provide a new disclosure and start the service time over if there are any increases in the APR or changes in the loan product.
The rollout of the new TRID rules has been a bit bumpy. Lenders, real estate attorneys, and title companies have had to adjust to the new processes, deadlines and expectations, but hopefully the end result will be more transparency and clarity to what has become an increasingly complicated lending process.