If we have learned one thing in the last seven years, it is that there will be a constant stream of new regulations affecting all of us in the Real Estate industry, as well as our customers. This year, the big news out of Washington and the financial industry’s watchdog agency, the Consumer Financial Protection Bureau (CFPB), is the new program replacing the old Good Faith Estimate, Truth in Lending and HUD-I. The program is called the “TILA/RESPA Integrated Disclosures” or TRID. (Let the acronym games begin!) Most will say good riddance to those old forms, and many agree that the new disclosures are a vast improvement. However, those improved and simplified disclosures come with 1.888 pages of new regulations that lenders must follow in creating and delivering those documents. The new rules constitute a change that will require cooperation between Realtors®, Title Companies and Lenders in order to ensure that our closings happen accurately and on time.
Currently, lenders provide a Good Faith Estimate and Initial Truth in Lending disclosure within three days of application. Those forms were designed to make consumers better shoppers for mortgages, but most agree that the forms are inadequate and confusing. How many times have you had to explain to a buyer what an APR is, or heard complaints that the Good Faith Estimate doesn’t tell them what their payment will be or how much money they need for closing?
Originally slated to take effect August 1, the CFPB has delayed the effective date to October 3, 2015. Buyers who make application for a mortgage on or after that date will receive a disclosure called the “Loan Estimate” or LE. It is a single, three page form. The CFPB realizes that most borrowers will pay the most attention to the first page, so they provided all of the most important information (including the total monthly payment and the amount needed for closing!) in an easy to understand format on page 1. Page 2 contains the detail of the numbers provided on page 1, and page 3 provides the most important information that was previously found on the TIL disclosure, including APR. You can see an example of the new form here:
Part of the regulations that accompany the new forms include a tightening of the accuracy standards for the charges to the buyer. That is the first area where Realtors and Title Companies can help: assisting in quickly determining accurate fees that the borrower will pay and communicating those to the lender.
Total Interest Percentage
Another new item is a figure called the “Total Interest Percentage” or TIP. This is a measure of the total interest paid on the loan over its entire term as a percentage of the loan amount. For example, a $100,000 loan at 4% for thirty years would have a TIP of 72%. We should be concerned about the reaction of a buyer who sees any number like 72% on any mortgage document (especially when it is called a Tip!). We will need to explain that 72% is actually a GOOD number (there have been very few times in the last 65 years where the TIP has been below 100!).
Closing Disclosure Form
The other major new form, which will be used in any transaction where the new LE is used, is called the Closing Disclosure Form (CD or CDF), which will replace the HUD-I Settlement Statement and the final TIL. It is a five page form, but the all important page one is nearly identical to page one of the LE, so the buyer will be familiar with the format. Pages two through five will again have more detail of the numbers, as well as a comparison chart so they can compare the final numbers to their initial estimates. Many of the pages are similar to the accounting tables on the HUD-I. There is also detailed information, including license numbers and contact information, about all of the providers in the transaction, including the Buyer’s and Seller’s agents, the lender, a Mortgage Broker if one is involved, and the settlement agent. An example of the CD can be seen here:
One of the biggest changes comes in the timing and form of delivery of the CD. The lender is responsible to ensure that the CD is delivered to the buyer three business days (which do not include Sundays or federal holidays) before the closing. That means that if a CD is in the borrowers hands on a Monday, the earliest the loan could close would be on that Thursday. If the CD is delivered on a Thursday, the loan could close on the following Monday. While that may sound like a great new feature, the truth is that it may take some time to work out the logistics, and some closings could be delayed. Make sure your lender has systems in place to minimize the impact on closings. Also, there is a concern that buyers may view the three day review period as an opportunity to back out of the deal. That could require some extra hand holding from their agent, as well as a reminder that the three days do not offer them an opportunity to get out of their obligations under their Purchase Contract.
There are still many questions about how the CFPB is going to enforce the new TRID, and we are relying on software providers’ new systems to handle the new requirements. One thing we do know is that with cooperation between the lenders, Realtors and closing agents, we can minimize the impact on our consumers. We all need to educate ourselves about the new forms and new procedures, because October 3 will be here before we know it!
Alan Fowler, CMB is the Director of Education for First Mortgage Company, LLC. Alan is a Master Certified Mortgage Banker with 34 years experience in Mortgage lending, and has provided education and training to lenders and Realtors around the world since 1996. You can contact Alan at firstname.lastname@example.org.
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