As with much that the CFPB does these days, there is some that is good, some bad, and some, just plain ugly. And for a cynic like me, everything – even the good stuff – seems to be imparted with a slightly paternalistic and patronizing tone.
You see, in the CFPB world view, the American people are divided into two basic camps: One is made up of evil, bloodsucking, vampire squids, looking to latch onto members of the other camp; the gullible, naïve, dumb and dumber set, who were all born yesterday.
And in one of the best examples of CFPB understatement, it declares that one of its “Core Functions” is:
“…to give consumers the information they need to understand the terms of their agreements with financial companies. We are working to make regulations and guidance as clear and streamlined as possible so providers of consumer financial products and services can follow the rules on their own.” [Italics mine.]
Huh? Can Director Cordray actually look at the TRID regulations (here) that became effective on Saturday, October 3, 2015, and say with a straight face to the finance and title industries, that its rules are “clear and streamlined”?[1]
But I digress…. The real purpose of this post is to summarize [for folks who prefer to regard themselves as members in good standing of the rank and file citizenry and who are neither sharks nor simpletons] the effect of the new TRID rules that will apply when they begin their search for a home loan, and end when they close the transaction in escrow.[2] Here’s the skinny:
The Loan Estimate. Upon receipt of a completed loan application,[3] the lender or mortgage broker is required to provide a “Loan Estimate” upon approval for financing. Gone are the “Good Faith Estimate” and “Initial Truth-In-Lending” documents. The purpose of the Loan Estimate, besides being more consumer-friendly, is – in theory – to permit the consumer to engage in comparison shopping for a loan between lenders.[4]
According to a recent Wall Street Journal article on the new Loan Estimate form:
Consumers can now easily check whether the loan amount, interest rate, monthly payment, escrow sum and the amount that a borrower needs to bring to the closing (a new feature) have changed from the lender’s initial estimates, Mr. Kelly says. The Loan Estimate also itemizes all closing costs and notes which services a borrower can shop for, such as title-search company and pest inspector.
The third page of the Loan Estimate includes information to help a borrower better understand the long-term costs of the loan. One new feature looks ahead to what the borrower will have paid in principal, interest, mortgage insurance and other loan costs at the five-year mark.
To help with comparison shopping, the Loan Estimate details the annual percentage rate (APR), so a borrower can put documents side by side and compare overall costs easily between loan products, such as a 15-year and 30-year mortgage, says Mathew Carson, a mortgage broker with San Francisco-based First Capital Group. The APR factors in not just interest rate but mortgage-broker fees and closing costs.
The Loan Estimate also shows the total interest percentage—the total amount of interest that you will pay over the loan term as a percentage of the loan amount.
Note: The Loan Estimate expires automatically if the borrower does not indicate to the lender or mortgage broker an intent to proceed with the loan transaction within ten business days after it was provided.
The Closing Disclosure. The Closing Disclosure is provided by the lender before closing. Its predecessors, the HUD-1 Settlement Statement and the final Truth-In-Lending Statement, are gone. The TRID rules require that a hard copy of the Closing Disclosure must be sent to the consumer at least three-business days before the scheduled closing date.[5] Personal delivery or electronic mail delivery may be used, but the three-business day period still applies.
The idea is that during this period, the borrower can compare it to the figures provided in the Loan Estimate and review for errors, etc.[6] Assuming everything is in order, closing may occur on the scheduled date.
Besides reducing paperwork, the new form is intended to convey to consumers a much clearer picture of their loan transaction, such as the interest rate, the monthly mortgage installments, and the total closing costs – all on the first page. Escrow costs are itemized to clearly show what portion of the loan payment goes to lender-required casualty insurance, mortgage insurance (if any), interest and property taxes.
According to the Wall Street Journal article above:
Overall, borrowers are going to have a much clearer notion of how much they will owe at closing and throughout the lifetime of the mortgage, says John Walsh, president of Milford, Conn.-based Total Mortgage Services. ‘The forms are much less confusing and more concise.’
The Three-Business Day Rule. As noted above, there is a three-business day waiting period between delivery of the Closing Statement and closing in escrow.
According to an excellent Buckley Sanders summary, subject to the following three exceptions, if there is a change to the Closing Disclosure after it has been provided to the borrower, the lender is generally permitted to deliver a revised Closing Disclosure at or before closing. The changes that require delivery of a revised Closing Disclosure and new three-business day period are:
- A change in the APR of more than 1/8 of 1.00% above or below the APR disclosed in the Loan Estimate, or, an irregularity in the transaction, such as multiple advances or irregular payment periods, or a change of more than 1/4 of 1.00%;
- A change in the loan product (e.g., from adjustable rate to fixed rate); or
- The addition of a prepayment penalty.
Conclusion. It is the possibility of 11th hour delays due to changes to the Closing Disclosure that has the real estate industry wringing its hands. However, the limited circumstances that could push off a scheduled closing date appear very limited.
Assuming a prudent borrower knows, in advance, the risk of making such a change right before closing, such a delay would seem unlikely – and in Oregon, foolhardy – since our standard form OREF Sale Agreement provides that the failure to close on or before the agreed-upon date means the transaction is automatically terminated. Most buyers would not likely jeopardize their transaction by such a last minute change. And if they did, the seller would likely declare a forfeiture of the buyer’s earnest money deposit, since the failure to close on time was avoidable. ~PCQ
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[1] Without pressing the issue, note that the regs have two different definitions of a “business day”, and each apply in differing circumstances. See explanation here.
[2] Note: The TRID rules only apply when a creditor or mortgage broker receives a home loan application from a consumer on or after October 3, 2015. Pending transactions already headed to closing will not be subject to the new law. The rules only apply to “closed-end transactions”, i.e. “A loan or extension of credit 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.” To read more, go to the following link here.
[3] A “completed loan application,” must include the following six pieces of information: (1) Name; (2) Income; (3) Social Security Number (to obtain the credit report); (4) Property address; (5) An estimate of the value of the property; and (6) Mortgage loan amount sought.
[4] I say “in theory” because with time frame protocols imposed by the rules, one has to question how much comparison shopping actually occurs.
[5] The three business day waiting period may be waived or modified due to bona fide personal financial emergencies.
[6] For a discussion of permissible tolerances on the Closing Disclosure, go to the following link here.
