BLOG VIEW: Who knew Christmas would come early this year? At least, it did for everyone associated with the mortgage lending industry when the Consumer Financial Protection Bureau (CFPB) in July announced that it was pushing back implementation of its new TILA-RESPA Integrated Disclosures rules from Aug. 1 to Oct. 3.
The irony is that implementation was pushed back as a result of an administrative error made by the CFPB in the filing of required documents. This irony is not lost on the lending industry. But it was a lucky break, in that it allowed both lenders and their vendor partners more time to test their systems and get ‘TRID-ready.’
The new rules remain confusing and ambiguous in some areas. Believe it or not, even with all the noise being made by the CFPB and industry trade groups, there are still many real estate professionals who don't understand TRID and how it impacts the lending process – or, even that it takes effect on Oct. 3.
So, what exactly is TRID and what does it do? TRID is an acronym for the Truth-In-Lending Act (TILA)/Real Estate Settlement Procedures Act of 1974 (RESPA) Integrated Disclosure Rule. It is also known as the ‘Know Before You Owe’ mortgage disclosure rule.Â
Needless to say, the changes being made are the most significant to impact the lending industry in decades. The goal of TRID is to empower consumers with timely and accurate information they need to make informed choices and to give them time to review the total costs of the mortgage before closing. The intent of TRID is very noble, but the application of the rules in all areas is equivalent to a black hole. The CFPB has acknowledged there are challenging areas.
For starters, there are potential conflicts in the timing requirements for the new loan estimate and closing disclosure forms. Blowing the timing on the delivery of these disclosures could open up lenders to enforcement action. Things can get really complicated when a consumer requests a change in the loan or an extension of the closing.Â
The new rules stipulate that a lender must deliver the loan estimate to the consumer within three days after receipt of a loan application and by mail at least seven days prior to consummation of the loan – which is defined as when loan documents are executed. The new closing disclosures must be delivered to consumers three business days prior to the closing or sooner. These closing timelines are similar to a cooling off period, similar to Section 32 Home Ownership and Equity Protection Act loans. So, any closing change may throw off satisfying the timeline requirements. This is yet to be completely clarified by the bureau.
An area of great concern for lenders is the delay in closing and the potential impact on fee disclosures. When a consumer makes a request to delay the closing after the closing disclosure has been tendered, more than seven business days before the new closing date, there appears to be no option for a lender to disclose an increase of certain fees. Remedy under this scenario is limited, complex at best.
For those in loan origination, the new rules will cause lenders and their ops units to review the manner in which they issued loan documents. There are two methods lenders utilize to issue loan docs. They call the process ‘wet’ or ‘dry’ lending. Due to the lack of uniformity on national lending or funding requirements, there are different funding rules depending on what state the property is situated in.
In ‘wet’ states, for example, there are good funds laws that compel a lender to provide funds to close the deal within certain timelines. In some cases, funds must be tendered to the closing agent with docs and in other cases on the final day of the rescission period or the day immediately thereafter. ‘Wet’ states are, in general, situated east of the Colorado River.
In ‘dry’ states, there is no such burden. In general, ‘dry’ states are situated west of the Colorado River. In these states, if there are circumstances that come up after loan documents are issued and those circumstances can be detrimental to the lenders interest, then the lender is not compelled to fund the loan. With the implementation of TRID, the timing aspect will be so cumbersome that lenders may have no choice but to convert to the ‘wet’ doc model across the board in order to make a good faith effort for lending compliance.
Another concern involves appraisal management companies and appraisers. That is, the ‘change of circumstances caveat’ of TRID. For example, lenders are required to give the estimate of an appraisal fee when the initial disclosures are issued to the consumer. If every home and area in the U.S. were exactly the same, this wouldn't be a problem. However, the challenge is that some homes and areas are more diverse and challenging than others. When a lender takes a loan application, it might think a property is one thing, and once the appraiser goes out to the property, there could be material changes to the property that have not been disclosed to the lender or the AMC/appraiser. Those fundamental changes impact the appraiser's scope of work and, consequently, the fee for the appraiser's or the AMC's services. This could prove to be problematic.
Some industry sources are looking to quote historic fees for appraisals, or flat rates (over estimation/pad). This process, in theory should help mitigate the appraisal fee challenges and create transparency for fee disclosure. Then again, industry groups have not been given clarification from the CFPB if historic fee schedules or flat rates are in compliance with TRID. Some industry sources suggest that over-estimation may not be compliant with the spirit of TRID.
Here is something else to consider: Ben Olson, former deputy assistant director for the CFPB, stated that padding or over-disclosing is not disclosing the best information reasonably available. Highballing it could put a lender out of compliance. Then again, the CFPB has stated that a lender can make a good faith estimate when exact estimates are not available.
This puts into question, what exactly is a good faith effort to comply?
As for the consumer, the timeline requirements could potentially have an unintended adverse impact on the closing. In a refinance situation in which the closing has to be extended due to the timeline requirement, it is possible that payoff documents can become expired and require updated demands, which can take additional time to be issued. If that's not bad enough, the additional per diem required to pay off an underlying mortgage may be so cumbersome that the consumer may not have the sufficient funds needed to close. Subsequently, the deal would not close as a result of the very regulation implemented to protect the consumer.
Conversely, in a ‘wet’ state purchase-money transaction, in which funds are wired with loan docs, it is very possible a closing agent will not know certain local recording fees, endorsement requirements or other ancillary fees until the day of the closing. Some fees are allowed, but even those fees can put the closing over the allowable tolerance. By the time a lender gets a closing package back, it may be too late; re-disclosure after the fact under TRID or Reg X as it relates to certain fees may put the lender out of compliance.
In the end, if appraisers or AMCs, title companies, and closing agents don't properly disclose their fees to lenders, even if padded, they may not get paid in the entirety for their services. On the flip side, even if a change may qualify under ‘changed circumstance,’ lenders may be stuck in a position that makes them unable or unwilling to re-disclose for any reason.
These scenarios alone are reasons that the industry is asking the CFPB to consider a grace period, or a hold-harmless period, for the enforcement of TRID for those that make good faith efforts to comply with these complex rules.
These scenarios alone illustrate how easy it might be for a lender, servicer or vendor to make a good faith effort to comply with the new rules but fall short on technical language or simply not have clarity on how the CFPB or other regulators will interpret and enforce these new requirements.
That said, recently, 20 trade groups representing lenders, banks, credit unions, title companies and many others with vested interest have signed a letter urging federal regulators to provide guidance on how they plan to enforce the new rules. These groups have concerns regarding the continuity of enforcement. Another aspect most real estate professionals are unaware of is that although the CFPB wrote the new rules, the enforcement of the new rules is kicked out among various regulators.
At the end of the day, it remains unclear if being ‘transparent’ or making a good faith effort to comply with the new rules will be sufficient. The CFPB has indicated it will be sensitive to good faith efforts to comply with the new rules. After all, a CFPB administrative technical error is the genesis of the Oct. 3 implementation date.
So strap on your helmet, as this ride may take us through a black hole that, at the moment, has no landing site on the horizon.
Jimmy Alvarez is director of risk management for Financial Asset Services Inc., a national asset management company specializing in providing asset management, property disposition and valuation services to mortgage companies and financial institutions.
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