August 1, 2015 is Showtime! That’s the date that the TILA/RESPA integrated disclosures rules known as “TRID” (hereinafter, the Rules.”) go into effect, compliments of the ubiquitous Consumer Financial Protection Bureau (“CFPB”), devil spawn of Dodd-Frank.
Realtors® Take-Aways. The Rules will change how, when, and what paperwork, lenders, mortgage brokers and escrow, will provide to borrowers during the loan application and closing process.
- The Rules will apply only to closed end loans.[1]
- While most Realtors®are generally aware of RESPA and TILA in the lending process, the new Rules change almost everything from the top down. There will be different terminology, just to remind us there’s a new sheriff in town. Instead of the “Good Faith Estimate” or “GFE” that we’ve grown accustomed to under RESPA, the new laws and forms strip out the “good faith” moniker, and give us the more pedestrian title, “Loan Estimate.” I, for one, preferred the old name, since it at least hinted at some bona fides in the lending process, and was an easy-to-remember acronym. The letters “LE,” have no panache.
- The Loan Estimate is required to be delivered within three days following receipt of the prospective borrower’s completed loan application.
- And instead of a “HUD-1” settlement statement required by TILA for decades, we now have the more prosaic term, “Closing Disclosure.” At least “HUD-1” was a name, conjuring up images of Paul Newman in the classic movie “Hud,” rather than a distinctly unsexy descriptionof the document itself.
The Three-Day Rule and “Consummation”. The Closing Disclosure must be provided at least three business days before “consummation” of the loan. And lest we not confuse it with the more prurient use of this term, the CFPB, presumably in stone-faced seriousness, clinically explains “consummation” as follows:
Consummation is not the same thing as closing or settlement. Consummation occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. (§ 1026.2(a)(13)).
The point in time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable State law. (See, §1026.2(a)(13); Comment 2(a)(13)-1) Creditors and settlement agents should verify the applicable State laws to determine when consummation occurs.[2]
Huh? So the braniacs behind these Rules adopted a new term for this national law, but then leave the definition of the term to the laws of each state! Why did they select this word, you ask? Here’s the answer, which, when you cut through the legalese, means that they were torn between “consummation,” a TILA term, and “settlement,” a RESPA term, so they did the logical thing – figuratively speaking, they flipped a coin:
The Bureau believes integrating the Closing Disclosure requirements in Regulation Z also satisfies the Dodd-Frank Act integration mandate. To meet the integration mandate, the Bureau must reconcile several important differences between RESPA and TILA. For example, to reconcile the different timing requirements under RESPA and TILA with respect to when the Closing Disclosure must be provided, the final rule generally requires that the Closing Disclosure be provided three business days before “consummation.” Regulation Z currently defines “consummation” as “the time that a consumer becomes contractually obligated on a credit transaction.” See § 1026.2(a)(13). Regulation X, by contrast, provides that the RESPA settlement statement must be delivered by “settlement,” which is defined as “the process of executing legally binding documents regarding a lien on property that is subject to a federally related mortgage loan.” See 12 CFR 1024.2(b). As noted by commenters representing the views of settlement agents, discussed in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), “consummation” and “settlement” may not necessarily occur at the same time. To ensure consumers consistently receive a single, integrated Closing Disclosure in a timely manner, the Bureau believes it must reconcile these differences. Accordingly, as discussed in more detail in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), the final rule requires that the Closing Disclosure be received three business days before “consummation.” Thus, as described above, the Bureau believes integrating the TILA and RESPA requirements applicable to the Closing Disclosure in § 1026.19(f)(1)(i) will satisfy TILA, RESPA, and the Dodd-Frank Act’s integration mandate, will facilitate industry compliance, and will enhance consumers’ understanding of their transactions.
So, when does the consumer become “legally obligated” to the lender under Oregon law? Although some may argue my point, common sense suggests it is when the transaction is “closed” in escrow. Pursuant to ORS 696.505(1), to “(c)lose an escrow means the final disbursement of all funds, property and documents in an escrow as directed by written escrow instructions from the principals.”
Accordingly, in Oregon, the three-day period to deliver the Closing Disclosure would likely precede the date escrow has possession of all funds and executed documents, and is ready disburse and record.
The Business Day Conundrum. If one catches the whiff of bureaucratic arrogance in the CFPB rulemaking process, their olfactory senses may not be far off. In Oregon, as in most states as far as I know, a “business day” is every day except Saturday, Sunday, and State or Federal holidays. ((See ORS 187.010 and definition here.)
But in the alternative universe of the CFPB, this commonsense definition doesn’t work. Read on ye of little faith:
Business day means a day on which the creditor‘s offices are open to the public for carrying on substantially all of its business functions. However, for purposes of rescission under §§ 1026.15 and1026.23, and for purposes of §§ 1026.19(a)(1)(ii), 1026.19(a)(2), 1026.31, and 1026.46(d)(4), the term means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a), such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
(See, http://www.consumerfinance.gov/eregulations/1026-2/2013-07066#1026-2-a-4)
This means that when counting business days, if the bank, say Wells Fargo (which is open during some of the day on Saturdays – though it “varies by location”), is open six days a week we would include Saturday as a “business day,” but not if the bank was closed on some or all of that day.
And to put a finer point on an already dull one, the CFPB offers an “Official Commentary” to help us mere mortals determine whether they should actually count Saturday as a business day. It’s called the “Business Function Test“:
Activities that indicate that the creditor is open for substantially all of its business functions include the availability of personnel to make loan disbursements, to open new accounts, and to handle credit transaction inquiries. Activities that indicate that the creditor is not open for substantially all of its business functions include a retailer’s merely accepting credit cards for purchases or a bank’s having its customer-service windows open only for limited purposes such as deposits and withdrawals, bill paying, and related services.
Now that helps! Knowing the scope of my bank’s business functions on Saturdays is much easier than reading a silly ol’ calendar. [Just because escrow isn’t open on Saturday is of no consequence to the CFPB’s glossary of terms. It still counts as a business day if the bank’s operating hours include Saturday.]
Changed Circumstances and the Three-Day Rule. Per a recent HousingWire.com article (here), according to Richard Cordray, the CFPB’s Director:
The three-day requirement should not interfere with a successful closing, as some have claimed. In fact, there has been some serious misunderstanding about what kinds of major changes would cause a delay of the closing date, so I want to take a moment to clear that up right now,” said Cordray.
The timing of the closing date is not going to change based on any problems you discover with the home on the final walk-through, even matters that may change some of the sales terms or require seller’s credits. On the contrary, we listened carefully to your concerns and limited the reasons for closing delays to only three narrow sets of circumstances.
Here are the 3 circumstances that would allow for closing delays:
- Any increases to the APR by more than one-eighth of a percent for fixed-rate loans or more than one-fourth of a percent for variable-rate loans
- The addition of a prepayment penalty
- A change in the basic loan product, such as moving from a fixed-rate loan to a variable-rate loan
Will the August 1, 2015 Implementation Date be Pushed Back? Not likely, according to the HousingWire.com article:
The CFPB extinguished the talk shortly thereafter saying, “We have no plans to delay the deadline on the new mortgage disclosure forms. The industry should be prepared to begin using the new forms for loans with an initial application submitted on or after Aug. 1. The deputy director was pointing out that the Bureau is open to considering new information from stakeholders, not to delaying the deadline.
To make matters worse, lenders will not have an opportunity to “beta-test” the new programs they’ve created to comply with these complicated Rules. The reason is that the law provides that where a loan application is received before August 1, 2015, lenders are required to follow the current GFE and HUD-1 laws and forms.
According to a recent article appearing in Lexology.com (here):
This lack of gradual transition to the new integrated disclosures has caused many lawmakers and trade organizations to question whether the CFPB should implement a non-enforcement period to allow creditors to adjust their processes to comply with TRID after August 1, 2015. On March 3, 2015, CFPB Director Richard Cordray provided testimony before the House Financial Services Committee in connection with the CFPB’s sixth Semi-Annual Report and responded to questions from Representatives Randy Neugebauer (R-Texas) and Brad Sherman (D-California) as to whether the CFPB would consider a 60-day soft enforcement period after August 1, 2015.
In response, Director Cordray remained noncommittal but indicated that a period of restrained enforcement would not be followed. Director Cordray stated that “[p]eople will have had 21 months to implement this regulation,” and additionally stated that the CFPB “won’t come in day one and bring the hammer down, but people should take the Aug. 1 date seriously.” On March 27, 2015, Representatives Neugebauer and Blaine Luetkemeyer (R-Missouri) drafted an open letter to Director Cordray requesting a hold-harmless period through December 31, 2015. The American Land Title Association (ALTA) similarly requested a five-month restrained enforcement period to allow creditors to tweak their processes in connection with problems that arise the during the preliminary stages of TRID’s effective period, citing the fourth-month non-enforcement period that the CFPB granted when the GFE and HUD-1 settlement statements were revised in 2010. More recently, on April 15, 2015, the Escrow Institute of California (EIC) joined in a letter from 17 other trade associations led by the Mortgage Bankers Association and ALTA asking the CFPB to implement restrained enforcement through December 31, 2015.
So far, the CFPB and Director Cordray have been unwilling to provide a clear stance as to whether a period of restrained enforcement will be implemented, despite the drastic changes required from creditors in order to comply with the TRID. For the time being, creditors should be prepared to implement their process and technology changes on August 1, 2015, in order to avoid the stiff civil and regulatory consequences of noncompliance with the integrated disclosure requirements unless and until the CFPB provides further guidance.
So, Realtors, get ready! Beginning on August 1, 2015, you will find that mortgage brokers, lenders, and your favorite escrow officer, are going to be speaking a slightly different language than you’ve been used to in the past.
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[1] Per Investopedia, here, a “closed end” loan is one in which “…the proceeds are dispersed in full when the loan closes and must be repaid, including any interest and finance charges, by a specified date. The loan may require periodic principal and interest payments, or may require the entire payment of principal at maturity.” This type of loan is called “closed end” to distinguish it from credit card and home equity loans, that drawn down over time.
[2] Riddle me this Batman: If “consummation” is not necessarily the same as “closing”, then why did they name the document [formerly known as the “HUD-1”], the “Closing Statement”, rather than the “Consummation Statement”?
