Editor’s note: The same day this article was published, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray issued a statement indicating that the “CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015.” See full press release at http://1.usa.gov/1dKWSDa.
June 17, 2015 – Lawyers involved in or advising clients on residential real estate mortgage lending transactions will have new rules to follow and new forms to fill, under changes that take effect Aug. 1, 2015.
As part of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the federal government created the Consumer Financial Protection Bureau (CFPB) regulate consumer financial products and services, requiring that the CFPB marry the disclosures contained in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) as those disclosures relate to residential mortgage lending
The new disclosures, known as “Know Before You Owe” and in the industry known as TRID (TILA/RESPA Integrated Disclosures), apply to all residential mortgage loan applications received by lenders on or after Aug. 1, 2015.
This article provides a brief overview of the loans that fall under the TRID disclosures and the new disclosures and forms that apply. It also discusses when lenders must provide the new disclosures.
Which Mortgage Loans?
The TRID disclosures apply to all mortgage loans currently governed by RESPA – transactions involving a federally related mortgage loan, which includes most loans secured by a lien on a one to four family residential property – except reverse mortgages, home equity lines of credit, and mortgages secured by a mobile home or by a dwelling that is not attached to real property (these types of loans will still close using the HUD-1 settlement statement). In addition, since RESPA doesn’t govern nonresidential mortgage loan transactions (including commercial loans), the TRID disclosures do not affect nonresidential closings.
What are the New Forms?
The new forms are posted on the CFPB’s website. The good, the bad, and the ugly of the new forms:
The good. With the very first page of the new Closing Disclosure Form (CDF) the residential mortgage loan borrower will know: the amount of the loan; the loan term; the interest rate; the monthly payment; if PMI applies, when that drops off; the closing costs; and the amount to bring to closing.
Under the current disclosures, a borrower would have to scour through the HUD-1 settlement statement, the mortgage, and the promissory note to find this information. Effectively, the first page of the CDF is a cliff notes version of all of the mortgage loan documents that the borrower signs.
The bad. The CDF fails to disclose where the borrower is to send the monthly payment. Additionally, the lender may have to disclose inaccurate and confusing title rates on the new “Loan Estimate” and CDF.
The ugly. The fifth page of the new five-page CDF introduces a new concept called “Total Interest Percentage” (TIP), disclosing to the borrower the total amount of interest that the borrower will pay over the loan term as a percentage of the loan. This concept is difficult to explain, not extraordinarily helpful to the borrower, and in surveys consumers have said this is confusing. Nonetheless, the new CDF requires this disclosure.
When Must Lenders Provide the Disclosures?
The borrower must receive the CDF no later than three business days before consummation. The new rules define a business day for purposes of the CDF as all calendar days other than Sundays and federal holidays; consummation is defined as the time that a consumer becomes contractually obligated on a credit transaction.
Cheri Hipenbecker (Minnesota 1999) is general counsel for Knight Barry Title Inc. Milwaukee. She brings expertise in real estate and business law, as well as title commitment and complex title issues. Reach her by email or by phone at (414) 727-4545.
Scott Hutchison (Marquette 1990) is branch counsel for Knight Barry Title Inc., Wauwatosa. He devotes a substantial portion of his efforts assisting with and closing residential and commercial real estate transactions. Reach him by email or by phone at (414) 727-4545.
This is probably the biggest change in the lender world. Historically, borrowers received the HUD-1 settlement statement the day before the closing, and historically the settlement agent (the closing attorney or title company) prepared and emailed the HUD-1 to the lender and/or borrower. After Aug. 1, this could be history.
Almost all lenders have indicated that they will control the CDF delivery (since failure to timely deliver may subject the lender to CFPB penalties and many national lenders have publicly stated that they will overnight courier or e-deliver the CDF to borrowers more than seven business days before the closing. As applicable to residential sale transactions, these time-sensitive dates will require that the seller-side closing statements be completed more than seven business days before the closing.
One of the biggest concern for buyers, sellers, and realtors is whether “any change” to the seller/buyer closing statements, and a corresponding change to the CDF, will result in the closing being delayed for an additional three days. The answer is no. Only the following changes will require a new three-day CDF disclosure:
An increase in the APR (annual percentage rate) by more than 1/8 percent for fixed rate loans, or more than 1/4 percent for adjustable rate loans;
The loan product changes within the three-day period prior to the scheduled closing (e.g. from a fixed rate loan to an adjustable rate loan); or
A prepayment penalty is added to the loan within the three-day period prior to the scheduled closing.
Changes to the transaction that do not fall within one of the three categories above will not require a delay in the scheduled closing. For example, if the “walk-through” the day before the closing shows that the appliances are broken or that a window is smashed, resulting in a credit from the seller to the buyer or an escrow for the repair, there will be a change to the CDF but no delay in the closing (however, keep in mind that loan underwriting conditions may prohibit or limit closing table adjustments including new credits or new post-closing escrows).
Likewise recalculations of tax pro-rations, real estate commissions, or utility payments will change the CDF but will not require a new three-day disclosure.
As a side note, although there will be no new three-day disclosure required in situations involving the examples above, a revised CDF will have to be prepared by the lender and delivered to the closing table for signature. This very well may cause a delay at the closing since the settlement agent will no longer have the ability to simply walk back to his or her office and make the applicable change on the HUD-1, because under the new rules most if not all lenders will be preparing and delivering the CDF to borrowers to avoid CFPB penalties.
Sooner rather than later. Because mortgage lenders need to get the CDF in the borrower’s hands at least three business days before the closing, when a settlement agent asks you to review a closing statement for a sale 10 days in the future, review the statement that same day so that the settlement agent can get the numbers to the lender timely to prepare and deliver the CDF.
Back-to-back closings. These may be problematic. For example, Scott is selling a home to Cheri in the morning and buying a home from Matt in the afternoon. If Cheri’s mortgage loan can’t close because Cheri’s lender didn’t timely provide the CDF, then Scott’s purchase of Matt’s home falls apart. And then Matt’s purchase of Kelsey’s home the next day doesn’t happen. Domino effect. Before Aug. 1, the first closing may be delayed a few hours; after Aug. 1, the first closing (and subsequent closings) may be delayed by three days to deliver the CDF.
Seller payments. On sale transactions, settlement agents will be ordering seller mortgage and other payoffs earlier than historically ordered (as the settlement agent will need to get final seller numbers to the buyer’s lender more than seven business days before the closing). Sellers then may be concerned about whether their monthly mortgage payment will be reflected in the mortgage payoff letter.
The answer: it depends on the timing of the payment and issuance of the payoff statement(s). Even if the payment is not reflected in the payoff statement, remind sellers that they have an independent contractual obligation to make their mortgage loan payment and that the mortgage lender will refund any overpayment(s) of the loan.
Place title order now. There’s no reason to delay. As soon as the offer to purchase is signed, place the title order and request payoff letters (even if the inspections are not complete and the appraisal has not been performed). Why? The title company must perform the title search, payoff letters must be obtained, and seller/buyer closing statements prepared, all at least seven business days before the closing, so that the lender can timely drop the CDF in the mail.
Ending on a high note, the new forms are simple to read with clear and concise information to the consumer regarding their loan terms. Hopefully, gone are the days of a consumer stating that they didn’t understand their loan terms, interest rate, and adjustments. Likewise, the new rules will permit the consumer ample time before the closing to ask questions about the loan and clarify obligations. But with all the good coming from the new forms and new rules, the industry anticipates that there may be a period of time when real estate professionals are being trained and implementing the new three-day CDF delivery procedures. The more you can inform your clients about these time sensitive dates, the smoother the transactions will be post-Aug. 1, 2015.