TRID: What Home Buyers Need to Know Now
TRID: It Came from Washington D.C.
Once again, the residential lending landscape has shifted in yet another attempt to make the cost of borrowing more transparent. My friend and colleague, Dan Shlufman, takes us through the new underwriting changes and how it may impact your decision to buy a home or to refinance a loan.
A Date to Remember
If you are in the housing market now or planning to purchase a home in the near future, you need to be aware of significant changes in mortgage lending that went into effect for all loans that were applied for on or after October 3, 2015. These changes were implemented by new regulations known by the acronym TRID, which stands for: TILA (Truth in Lending Act), RESPA (Real Estate Settlement Procedures Act), Integrated, Disclosure.
The Way it Was
For the past 30 years, when a borrower applied for a loan, a lender was required to provide a Good Faith Estimate of Closing Costs (“GFE”) to the borrower detailing the closing costs to be incurred when purchasing a residential property. The lender was also responsible for providing a “Truth in Lending Disclosure” which indicated the Annual Percentage Rate or “APR” of the loan. Both of these disclosure forms were difficult for consumers to understand and created confusion as to the ultimate closing costs and actual interest rate of the loan.
Changing the Process
With a view towards improving accuracy and disclosure, the federal agency that oversees mortgage lenders, the Consumer Financial Protection Agency (“CFPB”), updated the forms that are part and parcel of the residential lending process. In addition, the CFPB changed the document that was used at closings known as the HUD-1 Settlement Statement (“HUD-1”). The HUD-1 was intended to mimic the charges listed on the GFE and give the borrower an accurate picture of the costs incurred in connection with the purchase of a property. Unfortunately, the numbers did not always match up or make much sense. Over time, the existing documents became outdated and no longer served its intended purpose of providing borrowers with an accurate analysis of what a loan would actually cost.
What to Expect
For loan applications submitted on or after October 3, 2015, the GFE and the Truth-In -Lending Disclosure have both been replaced by a new disclosure form known as the “Loan Estimate.” The Loan Estimate was designed to make it easier for borrowers to understand the key terms, costs and risks of a mortgage loan earlier in the process. Among other things, the Loan Estimate requires that fees be listed separately and in alphabetical order and must be provided to the borrower within three “business days” of a borrower applying for a loan. A business day for purposes of the Loan Estimate is any day of which the lender’s offices are open for business.
A loan application is considered to be sufficiently complete to trigger a lender’s requirement of issuing a Loan Estimate when a borrower gives the lender these six pieces of information: the borrower’s name; annual income; social security number; property address; property value; and loan amount.
Getting Ready for Closing
Three (3) business days prior to the closing date, the lender must provide the borrower with a new disclosure form known as the “Closing Disclosure.” The Closing Disclosure replaced both the HUD-1 and the final Truth-In-Lending Disclosure. For purposes of the Closing Disclosure, “business days” are defined as days from Monday to Saturday and excluding major holidays.
To protect the borrower, there can be no variations from any lender charges stated on the Loan Estimate (such as underwriting fees or other lender driven costs). If the Closing Disclosure has higher lender charges, those costs are borne solely by the lender. Only a ten percent variation is allowable for fees disclosed on the Loan Estimate and those reflected on the Closing Disclosure for settlement services that are not related to the lender but which are provided by one of lender’s approved providers (e.g., an appraiser). There can be variations between the two disclosures greater than ten percent for any service that the borrower can shop for such as homeowner’s insurance, title insurance or legal representation.
Timing is Everything
Due to the new time-lines and procedures with TRID, most lenders are now cautioning that home loans which had previously closed in thirty days may now take forty-five to sixty days. This additional time frame may not impact co-op and condo transactions as significantly, as there is a similar time period to complete the purchase application to a co-op or condo. It should also be noted that different lenders are interpreting the above requirements in various ways with some lenders refusing to schedule a closing for up to two weeks after the Closing Disclosure has been issued.
A Request for Cooperation and Flexibility
With the new mandatory TRID disclosures and timelines, it’s critical that lenders, real estate professionals, attorneys and borrowers work closely together to keep the loan on track.For the next several months, when deals under TRID will begin closing (since it is only effective for loan applications dated after October 3rd), significant flexibility will be required of all parties in working towards setting a closing date.
Borrower Beware
Due to the timing changes, borrowers must pay special attention to the expiration of interest rate locks, which are usually effective for no more than sixty days (and often effective for a shorter period). Since any change to the loan or closing figures after a Closing Disclosure is issued will necessitate the issuance of a new Closing Disclosure (which requires an additional three business day waiting period), it is important that borrowers lock their interest rate for a long enough period of time to compensate for any delays caused by changes to the Closing Disclosure. To be safe, I strongly recommend locking in an interest rate that will not expire for less than fifteen days and possibly as long as thirty days after the anticipated closing date. If appropriate precautions are not taken, many borrowers may see their rate locks expire unless expensive extension fees are incurred. This possibility is especially true in the rising interest rate environment we are currently experiencing.
It’s For the Best…
Once lenders and closing agents become more comfortable with the changes, the introduction of these new forms and procedures may cause some delays in getting to the closing table, but overall, the revised process will eliminate confusion and improve disclosure for the borrower.
About the Author
Dan Shlufman is a Managing Director of Classic Mortgage, LLC, a mortgage bank engaged providing residential financing in the New York metropolian area. Follow Dan on facebook.