The Truth in Lending RESPA Integrated Disclosures (TRID or TILA-RESPA) is changing the lending landscape and how settlements are conducted. In fact we will no longer have settlements but more on that later. Like most construction projects, the original launch date has been pushed back. The changes were scheduled to take effect August 1 but now have shifted to October 1. Whatever the date, the first few months of the new program will be unknown territory and difficult to navigate for lenders, attorneys, agents, buyers and sellers. The professionals I speak with are expecting settlement delays and suggesting right after the launch to plan for 45 to 60 day settlements and forget about those quick 3 to 4 week closings. So if you are thinking of buying this year, you are well advised to secure that home and get the loan application process started before October 1.
WHY THE CHANGES
The Consumer Financial Protection Bureau (CFPB), was formed after the financial collapse to advocate for consumers. Part of their charge was to overhaul the mortgage process and make it more transparent. I assume the theory was that many consumers in mid 2000s signed loans that they did not understand and that misunderstanding led to the housing collapse. Had the documentation clearly stated the loan terms and if people knew in advance the true nature of their loan, then they would not have signed up for these onerous mortgages.
Well, I could probably write another blog on that one but let me state briefly that I believe they are only partially correct. Bad loans and bad lending practices were partly to blame for the housing crisis. Maybe even more than partly. But better disclosure on loans would not have stopped most of those borrowers from borrowing. I believe most knew that these loans would adjust and no matter how clearly it was stated, they would have still taken out the loan because at the time, it was not a worry. It was not so much that the buyer didn’t understand the loan terms but that they didn’t care. Prices were rising rapidly and if they couldn’t make the payments in future years, they would simply sell. Consumer and financial behavior fascinates me. As a whole, people seem to act like whatever is happening today will also happen tomorrow. Good disclosure or bad disclosure, if a buyer wants a house and a lousy loan is the only way to get it, more often than not, they are going to say yes.
(A quick aside – I am proud to say that none of my buyers during that time period have since sold sold via short sale or foreclosure and only 1 buyer of mine ever used a one of those nasty sub prime loans. That one was an unusual circumstance that I stayed on top of and made sure they quickly refinanced to a stable FHA loan.)
Anyway, regardless of the reason why the changes are coming and whether or not the reasons are valid, they are coming. Hey if a newly formed government authority is charged with changing something, well, they had better darn well change it.
And so they did in typical government fashion. Let’s start with the semantics and the silliness.
THE SILLY: YOU ARE NOT SETTLING – YOU ARE CONSUMMATING
For years I have been going to settlements and sitting at the settlement table reviewing documents and the HUD with the buyers who are borrowing from a lender . On October 1, according to CFPB, we will no longer have settlements. They will now be consummations.
Also, lenders will be creditors. Borrowers will be consumers and the HUD is being replaced with the closing disclosure.
So in the 4th quarter I will attend a consummation between the consumer and creditor as they review the closing disclosure at the consummation table. A marriage made in bureaucracy! But in the end the consummation is still an exciting event.
I assume the term clarifications will prevent future housing meltdowns and our tax dollars were well spent deciding what to call the participants and transaction.
It is nice to know I am still a Realtor. Whew.
THE GOOD: THE NEW FORMS ARE EASIER TO UNDERSTAND
Formerly when applying for a loan, you were given a good faith estimate (GFE). That form was somewhat clear but the CFPB has replaced the GFE with a lending disclosure. In essence it does the same thing as the GFE and outlines the loan terms but this form, in a more prominent way, lets the consumer see the rate, monthly payments, whether or not the principal and interest can change and/or if there is a pre-payment penalty. There are still some confusing parts but, in my opinion, it is a major improvement.
Then when going to settlement – excuse me, consummation – the borrower will no longer sign a HUD but will sign a closing disclosure. This form, for the buyer, is also much clearer than the old HUD. Furthermore the format is almost exactly the same as the lending disclosure which was given at the beginning of the process. This makes it easier than before to compare what was promised and what was actually delivered.
If I got into the weeds, I would point out some issues cropping up with these forms but these they really are quite well done.
THE BAD AND THE UGLY: EARLY ON THE LOGISTICS WILL BE A NIGHTMARE
The logistical changes are major. The work distribution between the title company and the lender – excuse me, creditor – will shift. And the burden upon the banks to get this right is heavy. If they make a mistake the fines can be devastating.
The times required for a creditor to give a consumer the lending disclosure are tightly defined. That is probably not a problem as that is early in the process.
The big issue is that the consumer can not settle until they have had 3 business days to review the closing disclosure. There is no work around here. So if the bank is late getting this out, consummation is delayed. No ifs ands or buts. It is scary to me that we will be so dependent upon banks acting on a timely basis. History has shown me that timely loan processing is not their strong suit.
If the consumer gets the closing disclosure and finds a mistake that needs to be corrected and that mistake changes the APR, a pre-payment penalty is added or deleted or the loan product is needs to be changed, a new closing disclosure needs to be issued. The 3 day clock starts all over again. Remember, this can not be waived except if the closing would result in a serious financial hardship for one of the parties. That has been explained as someone losing their home if they don’t settle on a certain date. It is not incurring storage fees by the moving company or a seller losing the home they wanted to buy because now they can’t settle on time.
Well, you say, the banks will write a note in the file that there were severe consequences so they had to void the 3 day rule and close on time. Not so fast. The banks are very, very scared of violating these guidelines. The penalties for violations are severe.
- First Tier civil penalties levied by the CFPB can be as much as $5,000, per day, per violation.
- Second Tier civil penalties of up to $25,000 per day, per violation for reckless violations.
- Third Tier civil penalties of up to $1 million per day, per violation for knowing violations.
I do think one million dollars a day will make the banks rather conservative on interpreting any loopholes.
Last, the entity preparing the final numbers will likely change. Currently, the title company gets the numbers from the bank and other sources (HOA, tax office, etc) and puts together the HUD. They then send it to the lender for review and approval. Most major banks, because of the heavy fines, are planning to control the closing disclosure. Information will start to flow the other way. The title company will still gather most of the numbers but they will send it to the bank for preparation of the final papers.
For the most part, title companies are small flexible entities that depend on repeat business from the local Realtors. They are quick, nimble and truly customer service oriented. I don’t know that I can say the same for big mortgage lenders.
In every seminar I have attended on this, Realtors have been advised to not write contracts with 30 day closings once this finally starts.
The work flow changes will cause initial problems. New forms and how to use them will slow down the process. And many vendors are wondering, since all of this needs to be computerized, if the new programs needed to prepare and collate docs will all be up and running on October 1 and if they will talk seamlessly with each other.
Other questions have arisen. What happens if right before settlement it is discovered a tax bill or a HOA bill has been paid and a pro ration needs to be changed? (Happens all the time.) Can the title company do it or does it go back to the creditor? Will it trigger another 3 day wait? Well, technically, that type of issue would not trigger a 3 day wait but with a million dollar a day fine looming over their heads, will banks decide that they won’t release funds until even minor changes have had a 3 day review? What about walk thru issues?
Lots of kinks to be worked out
SO, IN THE END, WILL IT HELP OR HURT THE HOME SALE PROCESS?
My guess is that a year from now, we will all be fine. We will be back to 30 day closings and all parties will have adjusted.
I have already heard a few creditors state that they will be giving the closing disclosure out once the appraisal is done and a few other numbers are verified so they are not pushing up against consummation. Remember the approval process has nothing to do with the numbers. The lending disclosure and the closing disclosure only show the loan product and terms selected by the consumer. The purchaser still needs to be approved for that financing.
So in the end, I think the new forms are a tremendous improvement over the current forms. Any change is hard but I think this one is worth going through.