Understanding the Changes

Editor’s Note: Sources for this article include RESPA 12 U.S.C & 2602; 15 U.S.C. & 1602 (f); TILA-RESPA Integrated Disclosure Rule Small Entity Compliance Guide, Consumer Finance Protection Bureau 31 (June 2015). View the guide at go.nvar.com/CFPBTRID

The Truth In Lending Act (TILA), first passed in 1968, was enacted to safeguard the consumer in connection with obtaining credit. The Real Estate Settlement Procedures Act (RESPA), first passed in 1974, was put in place to protect real estate purchasers. The primary goal of RESPA is to assist consumers to become better shoppers for settlement services. Lowering costs by removing unnecessary kickbacks and referral fees from settlements is a secondary consideration. In 2013, these laws were combined to cut the overlap and confusion between TILA and RESPA. The integrated disclosure rules will take effect On October 3, 2015. Real estate practitioners should be aware of the pending changes.

WHEN DOES TRID APPLY?
TILA-RESPA Integrated Disclosure (TRID) is triggered upon application for a “federally related mortgage loan.” 
The mortgage loan must be either the first or a subsequent lien on a residential dwelling that will house no more than four families, and the lender must be federally related.

Construction-only loans, vacant land, and properties with 25 acres or more did not fall under RESPA, but now do fall under TRID. Business, commercial, and agricultural loans are still exempt from these rules. 

HOW WILL TRID AFFECT THE CLOSING OF THE LOAN?
While TRID imposes no direct obligations on real estate professionals, the rules will impact the way agents do business. There is little doubt that the process will take longer, especially in the beginning as lenders, borrowers, and agents adjust to the new requirements. For this reason, many in the real estate industry are recommending that parties allow 45 to 60 days from contract ratification to consummation.

With the increased time it will take to consummate a transaction, it is important for the buyer and buyer’s agent to make sure that the rate lock is set to last for this extended period of time. If rates increase and the lock expires, approval may become a problem. 

Under TRID, a new CD and an additional three-day waiting period will be required if the Annual Percentage Rate (APR) changes beyond acceptable limits, the loan product changes, or a pre-payment penalty is added. An APR change would be a change in origination or discount points, a change in the loan amount, a special credit paid outside of closing, or changes to the property type. Any change to the CD during the three-day waiting period will require lender approval which will likely result in delayed consummation.
  
HOW DOES TRID HELP CONSUMERS?
The Consumer Financial Protection Bureau (CFPB) had four goals in implementing TRID: 
(1) Make the cost of a mortgage loan more understandable for the consumer 
(2) Eliminate surprise closing cost increases at the time of consummation
(3) Provide the consumer with more time to shop for a mortgage 
(4) Make it easier for a consumer to comparison shop for a mortgage. 
As a result, the information provided within the required disclosure forms includes costs for specific services, practices for lender servicing and escrow, and business relationships between service providers. 

The Loan Estimate (LE) must be delivered within three business days of the application being made, and must be delivered to the borrower at least seven prior to consummation. Upon receiving the LE from the lender, the buyer has 10 days to proceed with the transaction or walk away. The CD must be delivered to the borrower at least three days prior to consummation. . 

The TRID LE is less of an estimate and closer to the actual charges, but there are levels of tolerance for variations. 
The lowest tolerance tier is for charges to the creditor, mortgage broker, and associated fees. Lenders and mortgage brokers cannot guess what their fees will be, and if they are incorrect the difference must be refunded entirely. 

The next tier of tolerance is 10 percent for services not charged by the lender but still capable of being estimated by the lender. As with the original GFE, this 10 percent tolerance reflects the total sum of these charges; even if individual charges in this class are greater than 10 percent or are not even listed in the original LE, as long as the aggregate of these charges is within 10 percent of the original estimate the lender won’t be penalized. If the aggregate is not within 10 percent, the difference must be refunded. 

The third tier is “variations permitted.” These costs, which include HOA fees and insurance, cannot be properly estimated by the lender, so lenders are only required to give good faith estimates based on reasonably available information. 

                   
THE ROLE OF THE AGENT
Agents will need to be proactive in all aspects of the transaction, leaving nothing to the last minute
• Order inspections early 
• Make sure work is completed early 
• Do the initial walk through seven days before consummation. 
• Avoid back-to-back and coinciding settlements. 
• Track loan progress; make sure the lender and the settlement agent are working together and have everything they need in order to close on the scheduled date
• Maintain regular contact with all parties in the transaction (lender, settlement agent and vendors) and avoid last minute changes. Any change must be communicated to the lender as soon as possible. 

Most important, agents will need to manage their clients’ expectations. Inform clients that delays are likely, and propose a back-up plan in the event of a last minute delay. Such plans may include a post-settlement or pre-settlement occupancy or monetary compensation to cover a hotel stay or carrying costs.