What Is It
TRID is an acronym for Truth-in-Lending Act/RESPA Integrated Disclosures. It became effective on October 3rd, 2015, and its purpose is to simplify mortgage disclosure forms. TRID is a product of the Consumer Financial Protection Bureau (“CFPB”) which assumed the oversight role previously held by HUD, and is one of many changes resulting from the Dodd-Frank Act. TRID combines the prior TILA and RESPA disclosures into two forms: the Loan Estimate and the Closing Disclosure.
The Loan Estimate
The Loan Estimate is the first disclosure mortgage applicants will see. It contains figures and calculations not previously seen in mortgage disclosures, some of which are helpful, and some of which may cause confusion.
The Good, The Bad, And The Ugly Of The Loan Estimate
Gone are the days of a lender grabbing an application fee and roping in the consumer, who of course does not want to lose the fee. One of the requirements of TRID is that the lender cannot charge a fee – except for the credit report – until after a consumer has received a Loan Estimate, and has consented to proceed with the transaction. The consent must be expressed, i.e., if the consumer is silent, this silence cannot be interpreted as consent.
The lender must send the Loan Estimate within three business days after receiving an application from a consumer and the final Loan Estimate must be issued at least 7 business days prior to the closing.
The cost estimates used by the lender in calculating the Loan Estimate must be made in “good faith”, meaning that the numbers will be presumed to be based on the best information available and the lender may have to refund to the consumer certain amounts if the amounts vary between the Loan Estimate and the Closing Disclosure. It’s expected that lenders will “pad” fees to assure the actual fees will come in lower. A consumer has 10 business days after it is deemed to have received the Loan Estimate to decide whether to proceed with the transaction.
The Good Part Of The Loan Estimate
The Loan Estimate displays the cost of the mortgage over 60 months, and this cost includes not only the typical mortgage payments, but also any upfront costs which were associated with obtaining the loan. What are these upfront costs? Items such the appraisal fee, title insurance, and escrow fees. These fees can often run into the thousands. By displaying the cost of a mortgage in total, a consumer can more easily compare loan offers.
The Bad Part Of The Loan Estimate
Here is where the CFPB meant well, but may have made things worse. The main focus of the Loan Estimate is to alert mortgage consumers to the cost of a mortgage over 5 years, or 60 months. So far, so good. 5 years is a reasonable benchmark because many mortgages do not last more than five years, as homeowners tend to move, or refinance, within that period. Further, many adjustable rate mortgages are fixed for the first five years.
The CFPB created confusion by requiring the prominent display of the APR, and the interest paid over the life of the loan. This is sure to cause confusion. An APR is a theoretical calculation which assumes a perfect amortization over the term of the loan. By perfect amortization I mean identical payments for 15, 20, or 30 years and it only applied to fixed rate mortgages because nobody can predict which way an ARM loan might go. A perfect amortization means no early pay-offs, no home sale, no mortgage refinance no extra prepayments – ever. In a perfect amortization, the APR will reflect the cost of the loan if amortizing not only the loan, but any loan origination charges from the lender. Here’s where the inclusion of an APR causes confusion. Mortgage borrowers rarely if ever keep their mortgage forever! Thus the display of a lifetime APR next to a 60 month summary of costs is confusing. APRs are sacred in terms of finance disclosures for cars and credit cards, but in the case of the Loan Estimate, mixing a 30 year APR for a mortgage with a 5 year snapshot is not helpful.
The Ugly Part Of The Loan Estimate
The CFPB also requires that the interest paid over the life of the loan, and when compared to the original amount borrowed, be listed as a percentage. This figure is irrelevant because in all likelihood, the mortgage applicant will not keep the mortgage for life, and even if so, will most likely pay down the mortgage aggressively in later years, thereby mitigating interest charges.
The inclusion of a lifetime APR, and a lifetime of interest paid (expressed as a percentage to the aggregate loan amount no less) is not useful to the typical mortgage applicant. What is useful? The mortgage payment, and the costs to obtain that payment. Fortunately the Loan Estimate includes these two critical figures.
Patience Will Be Required
The Loan Estimate is here to stay, and it is sure to cause headaches. While the intent of the CFPB was to protect and educate consumers, the Loan Estimate itself may cause unintended consequences, especially as it relates to the timing of real estate transactions. If for example any part of the loan transaction changes, such as an adjustment to the loan amount, or loan program, or a higher or lower rate, the Loan Estimate must be reissued, and a new waiting period is established. This has the potential to wreak havoc on loan closings and real estate closings, as most if not all of these transactions “come down to the wire”.
Thanks to our Federal Government you can expect the closing to take “FOREVER’ if there are any changes to the loan product. YES – any changes – it will trigger RE-DISCLOSURE and therefore DELAY the closing on your new home, not to mention the impact on selling your current home if that is the case, we call this the domino effect. In the olden days before TRID you could close on a property in as little as 20 days. Now you can expect to wait up to 60 days.
The timeline still includes our Due Diligence Period and now it is extended to increase upwards of 45 to 50 days. So be prepared. The only way to assist the entire process is to be responsive to the lenders inquires and needed information or paperwork. SO IF THE LENDER ASKS FOR ANYTHING YOU NEED TO REACT PROMPTLY.