The new TILA-RESPA integrated disclosure (“TRID”) rule becomes effective October 1, 2015. Previously, two different federal agencies developed and mandated separate forms for residential consumer loans. Two different federal statutes were relied upon: The Truth in Lending Act (TILA) which required the Truth in Lending disclosure, and the Real Estate Settlement Procedures Act of 1974 (RESPA) which required the HUD-1 settlement statement.
The intent of the rule and new forms was to make closings more transparent for consumers. These changes arose out of the Dodd-Frank Act which followed the 2008 financial crisis, and the creation of the Consumer Protection Financial bureau and its “Know Before You Owe” initiative. The Bureau’s goal was to integrate the separate mortgage loan disclosures under TILA and RESPA into a single set of consumer disclosures. Thus, the TRID forms were created.
Types of Mortgage Loans That Are Affected
The new rule affect most closed-end mortgages secured by real estate, including closed-end home equity loans. It does not apply, however, to home-equity lines of credit (HELOC’s) or reverse mortgages. The new rule applies to certain trust borrowers, but does not apply to limited liability companies, limited liability partnerships, or corporate borrowers. Generally speaking, the use of the proceeds from the mortgage loan will determine the applicability of the new disclosure rule. The new rule only applies to dwellings attached to real property, so chattel-dwelling loans such as loans secured by mobile homes are not subject to the new rule. Certain types of loans that are currently subject to Truth-In-Lending regulations but not RESPA are subject to the new integrated disclosure requirements, if the loans are made for a consumer purpose. Such loans include construction-only loans, loans secured by vacant land or by 25 or more acres.
The Major Changes to Existing Practice
The Loan Estimate. The new Loan Estimate (LE) form replaces the existing Good Faith Estimate (GFE) and the initial Truth-in- Lending (TILA) disclosure. This new LE form replaces the GFE’s numbering system with general highlighted categories of areas, such as “Loan Terms,” “Projected Payments” and “Costs of Closing.” The Loan Estimate must be provided within three days of receipt of a borrower’s application. A copy of a fully-completed sample form may be downloaded here: http://files.consumerfinance.gov/f/201403_cfpb_loan-estimate_fixed-rate-loan-sample-H24B.pdf
Rules Concerning The Loan Estimate. There are several important new rules governing the Loan Estimate. First, the lender may not charge the consumer until the consumer receives the Loan Estimate and agrees to move forward. So, fees such as application fees that are collected from the consumer are still permissible, provided that they are collected after the LE is received and approved.
Second, the loan application is considered “complete” when the consumer’s name, income, Social Security number, property address, value estimate, and loan amount sought are supplied to the lender. Once these six items are provided, then the application is deemed complete, even if additional information must be provided to the lender in order for the lender to approve the loan.
Third, the lender must inform the borrower that the terms and costs may change if the lender provides an estimate prior to the issuance of the Loan Estimate.
The Closing Disclosure. This form replaces the prior HUD-1 and final Truth-in-Lending forms. This form uses the same general highlighted categories as the Loan Estimate. The Closing Disclosure is the responsibility of the lender, so the lender coordinates the delivery of the form to the borrower. The form must be provided to the consumer at least three days prior to "consummation" of the loan. The rules require that the Loan Estimate and Closing Disclosure must match at the closing. For a sample of a completed Closing Disclosure form please click here http://files.consumerfinance.gov/f/201403_cfpb_closing-disclosure_cover-H25B.pdf
Tolerance Requirements Between Loan Estimate and Closing Disclosure
The new rules have various tolerance levels between the Loan Estimate and the Closing Disclosure. These tolerance levels (previously known as variances) vary based on the type of fees, consumer choice, and who the consumer is paying for the item or service. The tolerance levels are divided into three categories: Zero tolerance, Ten Percent Tolerance, and No Limit.
Zero Tolerance Category. The zero-tolerance category includes:
- Fees paid to the lender, mortgage broker, or their affiliate;
- Fees paid to unaffiliated third parties of the lender when the consumer has no choice but to use that party; and
- State and/or county transfer taxes.
Ten Percent Tolerance Category. The 10% limit category includes:
- Recording fees charged by the various registries of deeds or land court offices;
- Third-party services not paid to the lender or its affiliate; and
- In instances where the consumer chooses a third-party service from a list of providers suggested by the creditor.
No Limit Category. Some fees have no limit in their variance, such as:
- Prepaid interest (also called “odd-days interest”) which the borrower pays upfront to adjust the mortgage payment to land on the first day of the following month;
- Property insurance premiums;
- Funds placed in escrow or reserve accounts;
- Third-party services chosen by the consumer but not provided by the lender;
- Third-party services not required by the lender.
Three Day Delivery Requirement
The Loan Estimate must be provided three business days after the loan application, and at least seven days before consummation of the loan. The Closing Disclosure itself must be provided three business days before consummation of the loan. When the lender sends these disclosures by mail, they must add three additional business days for delivery in order to be in compliance with the rule. When sending by email, the lender must add three additional business days if it cannot confirm receipt by the consumer. But if the lender can confirm receipt of the email, then the three-day period begins upon electronic delivery.
Definition of a “Business Day”
The term “business day” is defined two different ways under the new rule. For the Loan Estimate, a “business day” is a day on which the creditor’s offices are open to the public for carrying on all of its business functions. For the Closing Disclosure, a business day is any day except Sunday and federal public holidays.
Definition of “Consummation”
Consummation is the time when the borrower becomes contractually obligated to the lender. It may occur at closing it is very likely to do so, but it does not have to.
Resetting the Waiting Period for Delivery of Disclosures
Three major events will reset the waiting period between delivery of disclosures and closing the loan:
- One-eighth percent APR change on fixed-rate loan, or one-fourth percent APR change on variable-rate loans (a decrease in interest rate will not trigger a new disclosure);
- Insertion of a prepayment penalty; and
- A change in the loan product, such as switching from a fixed rate to a variable rate loan.
A post- closing revision discovered within 30 days where the borrower has to pay more could occur in instances such as when the tax adjustment is incorrect, or some other adjustment needs to be made. In in these instances the bank must be informed and a corrected closing disclosure must be provided within 30 days.
For more information go to www.consumerfinance.gov/regulatory-implementation/TILA-RESPA/
Brooks and Crowley LLP has stood well-prepared for the new rule and its implementation. We have been vetted and verified by Secured Settlements, Inc., which verifies settlement agent compliance with ALTA Best Practices. We are fully compliant with all privacy regulations and experienced with all manner of real estate transactions. We are at all times prepared to close any and all real estate transactions for our clients all over Massachusetts.
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