Hello TRID --- Goodbye HUD-1

What is TRID? On October 3, 2015 the new “Know Before You Owe” mortgage disclosure rule also known as TRID went into effect. TRID is the acronym for TILA-RESPA Integrated Disclosure. TRID implements the most extreme change to the way real estate closings have been conducted in the last 50 years. It was mandated by the Dodd-Frank Act, originally titled the Restoring American Financial Stability Act of 2010. TRID’s purpose is essentially to protect consumers from unscrupulous banking practices that brought about the Great Recession; it creates more transparency and accountability.

TRID combines the existing RESPA (Real Estate Settlement Procedures Act) and TILA (Truth in Lending Act) disclosures with new requirements from the Dodd-Frank Act to assist consumers in understanding the mortgage process, help with comparison shopping, and aid in preventing last minute surprises at the closing table. These rules will pertain only to a mortgage transaction and not to a cash sale.

Loan Application Process

Oversight of the new TRID rule has been given to the Consumer Finance Protection Bureau also known as the CFPB. The CFPB has created two new forms and a three business day delivery requirement. The first of the forms is the Loan Estimate (LE) and it will be delivered by the Lender or the Mortgage Broker to the consumer. The LE replaces the Good Faith Estimate (GFE) and Truth in Lending Disclosure (TIL) which will no longer exist. The LE primarily affects the Lenders requiring them to be held accountable to the exact charges listed in the Loan Estimate form.

Some of the advantages of the new LE according to Mathew Carson, a mortgage broker with San Francisco-based First Capital Group are: “To help with comparison shopping, the Loan Estimate details the annual percentage rate (APR), so a borrower can put documents side by side and compare overall costs easily between loan products, such as a 15-year and 30-year mortgage. The APR factors in not just interest rate but mortgage-broker fees and closing costs.”

The new rules also require that the LE form be provided to the consumer within three days after receiving the following Loan Application information. However, it is important to note that the LE is insufficient for a lender to guarantee a loan as it only asks 6 questions:

1. The Consumers Name
2. The Consumer’s Income
3. The Consumer’s Social Security Number
4. The Address of the Property the Consumer is Buying
5. The Estimated Value of the Property
6. The Loan Amount the Consumer is requesting

No lender will be able to make a business decision based solely on the LE so more data will have to be obtained from the Borrower and a much more formal application will have to be submitted by the borrower so it is important to know how much time an individual lender requires to process a more formal application.

Real estate licensees will need to know from their buyer’s chosen lender how much time will be required after the Purchase and Sale contract is signed and the formal application is submitted, and how long the financing contingency should last before a closing can take place.

What is the Closing Disclosure (CD) Form?

The second form is the Closing Disclosure (CD) and it will replace the HUD-1 Settlement Statement which will no longer exist. The CD form will contain similar information to the LE, and will allow the consumer to compare the two documents.

Explaining the Loan Estimate (LE) Procedure

Let’s start with how the LE procedure: the form is three pages long and is provided to the Consumer by the Lender or Mortgage Broker. By law, it must be delivered or postmarked within 3 “business days” of taking the Loan Application, and that includes Saturdays and National Holidays.

The day after the completed Loan Application is received by either the Lender or Mortgage Broker the three day clock starts and during that period the Lender can reject and the Borrower’s Application and Borrower can withdraw their Loan Application. The reason for the three day waiting period is so the Consumer can take a careful look at the numbers and if they have any questions there will be time for those questions to be asked.

In an interview with the WSJ, Bob Kelly, an executive with Bank of America said, “Consumers can now easily check whether the loan amount, interest rate, monthly payment, escrow sum and the amount that a borrower needs to bring to the closing (a new feature) have changed from the lender’s initial estimates”.

On the third business day the LE must be received in hand or must be mailed. Most lenders plan on using the US Mail, and that scares the heck out of me here on Martha’s Vineyard. I would think FedEx would be a better choice but there are problems there too because of the lax signing procedures in effect. It appears that it may be acceptable to use encrypted email although emails are not considered hand delivered, just received. Business partners are creating electronically secure website portals where customers will be given a user name and password to access and fill out documents to be signed with e-signatures.

When Can a Closing Occur?

When the LE is received on the third business day the seven business day period begins before the closing can occur. The Lender cannot have a closing any sooner than seven days after the LE is received. The way this works is that it is assumed that it will take three full days for USPS mail delivery so the LE is expected to be in hand on the fourth day, and that fourth day becomes the first day before the earliest date the closing can occur which is three days beginning with the day the LE is received. So it is seven days and on the eighth day the closing can occur.

Here is a link to the CFPB Loan Estimate (LE) Explainer

http://www.consumerfinance.gov/owning-a-home/loan-estimate/

Explaining the Closing Disclosure (CD) Procedure

Now let’s take a look at the Closing Disclosure procedure. The CD replaces the current HUD-1 which we were using for the last few decades, as well as the final TIL that the Buyer would receive and try to make sense of at the closing table.
The CD is five pages long and is provided to the Borrower by the Lender or Settlement/Escrow Agent.

The CD must be received 3 business days before consummation and that includes Saturday whether the lender is open or not.

All the amounts the Buyer and Seller are going to have for adjustments, all of the Lenders amounts, all of the closing costs, information on interest rates, any information on prepay interest, bank required disclosures etc. all has to be on the 5-page Closing Disclosure.

If the CD is not given in person, and most CD’s will be either mailed or FEDEX’d, 3 additional business days will be added for presumed receipt. The consumer may not waive the 3 day waiting period unless there is a “Bona Fide Personal Financial Emergency”, and I am told most lenders consider nothing to be a bona fide financial emergency.

IMPORTANT UPDATE:
CLOSING DISCLOSURE (CD) AMENDMENT

On July 29, 2016, amended its requirements under the Truth in Lending Act . It was back at the very beginning when the CFPB first implemented the ‘Know Before You Owe’ mortgage initiative that the National Association of REALTORS® expressed its concern regarding the handling of the “Closing Disclosure”.

The CD is intended to be delivered to homebuyers in advance of their closing, as it contains important financial information that relates to their purchase. However, many lenders have been withholding the CD from REALTORS® and real estate agents alike since ‘Know Before You Owe’ went into effect, despite sharing similar information, which was a longstanding tradition with the HUD-1.

NAR claimed that giving REALTORS® access to the CD would enhance the consumers understanding of the home purchasing process and their mortgage, which in turn would help the agents to continue providing professional guidance to their clients.

The REALTOR® organization has pledged itself to continue monitoring the TRID issues that will surely continue to frustrate our industry and its partners.

What Can Stop a Closing?

Should there be certain changes to the CD, the closing will be stopped, new disclosures must be given and it will require a new 3 business day waiting period. This could have serious consequences for the borrower. What are three things that could stop a closing?

1) If the annual percentage rate increases. For most loans that would be one eighth of one percent for a fixed rate loan or changes by more than one quarter of one percent for an adjustable rate loan.

2) If a prepayment penalty becomes applicable to the mortgage loan.

3) If the borrower wants the loan product changed.

However, things that will not trigger a new three day waiting period would be an adjustment for the purchase of personal property, a credit for repair of damage to the property while the seller or last tenant was moving out, or the purchase of a home warranty. These changes can be made right at the closing table if necessary.

Cash Buyers and New TRID

In a competitive market such as Martha’s Vineyard, any delay in a closing could very well hurt a borrower competing in a multiple offer situation with cash offers. Cash buyers are going to have a much stronger position than they already have.

CD Time Lines: Hand Delivered vs. USPS Mail

Three-Day Closing Disclosure Rule

Here is a nice graphic created by the American Land Title Association.

The largest lending institutions like CitiBank, Wells Fargo, Chase and Bank America have already decided they will be mailing the Closing Disclosure, because it provides them with what lawyers call a “safe harbor”, and by mailing the CD they will “assume” that the borrower has received it and they don’t need to track delivery receipts. However, local banks on Martha’s Vineyard like Santander, Martha’s Vineyard Savings Bank and Edgartown National Bank will also have to resort to using the USPS to mail the Closing Disclosure for obvious reasons – most Martha’s Vineyard home buyers live off Island.

New TRID Will Extend Closing Schedules

So it is important for everyone to know that they can expect at least one more week added on to the normal time frame before a closing can take place. On Martha’s Vineyard I would even add more days because we all know how reliable the US mail is on the Island. It is important to note that the CD that goes into the mail 7 days before the closing will have all the information necessary to close.

The amounts of all the deposits, the Loan Policy and Owner’s Policy Title Insurance and any endorsements to those policies needs to be on the CD.

All the attorney’s fees for title search, title exams, closing fees, and all recording fees, the cost for a surveyors mortgage plot plan, all real estate commissions and Seller payoff(s) with the amount of any breakdown.

Any and all credits between the buyer and seller, such as Home Owner Association (HOA) fees and the proration of those fees. This will require seller agents to find out who the HOA contact is for that information when they list the property for sale.

Taxes and Assessments not only paid by the Seller but those prorated between the Buyer and the Seller. This includes all taxes whether the Lender is escrowing for them or not.

Any fees for pest inspection, all Structural Home Inspection fees which could include Radon, Lead Paint, water quality and well tests, soil tests, Title 5 septic repairs, the smoke detector certificate fee and any out of pocket seller agent charges associated with making the home compliant.

The cost of a Home warranty, the amount for a home hazard insurance premium.Proper spelling of names along with correct addresses and zip codes needs to be on the CD.

The names, addresses and license numbers for both the real estate companies and the agents involved in the transaction must be listed giving the name of the company the agent’s name, the address for both the company and the agent, the company broker license and the agent’s license ID, and that license ID must identify the state that issued it. The real estate agent’s email address and phone number must also be listed. Why? The CFPB wants the Buyer and Seller to know who they can contact just before the closing should they have any questions and after the closing should they have any complaints.

The same thing applies to attorneys and settlement agents; they will have to list their company name, their name and Massachusetts Bar Registration Number, email address and phone number.

All of this information needs to be gathered and it needs to be accurate, so this will probably begin 10-12 days before the actual closing. Closing Attorneys will be ordering Municipal Lien Certificates (MLC) and Title examinations well in advance of the actual closing. Adjustments for fuel oil and Propane will have to be done well in advance of the actual closing as will adjustments for town water and sewer. Buyers and Sellers need to know this right from the very beginning because this could raise disputes. Think about it, the fuel reading is taken 10 days before the closing and then we have a frigid spell and the Seller burns a 100 gallons of fuel. Or the town water reading is taken and then we have no rain for 10 days and the Seller waters his lawns for hours and hours. It’s important to look at the big picture and relax. Keep your eye on the prize.

Penalties: The CFPB Means Business

Oh, and if you don’t think the CFPB is serious about making sure this is done properly, there are penalties for not following the rules:

$5,000 per day for failure to follow the laws of regulations

$25,000 per day for gross negligence

$1,000,000 per day for intentional violations

Although the HUD-1 we were all accustomed to is no more, I thought I would include some of the information I had on my HUD-1 page regarding approximate closing costs as it may still be useful to you.

Estimated Buyer's Fees

Here are some of the charges that a Buyer is going to face:
(Note: I have done my best to provide accurate fee charges; however, there may be differences in some cases.)

• Attorney's fees can range anywhere from $600.00 to $10,000.00 all-inclusive.
• Land Bank Fee (2%) -- See my article "What is The Land Bank?" Deed Stamps = $4.56 / $500.00 paid by the Seller
• Recording fees
  • Declaration of Homestead = $35.00 • Declaration of Trust = $255.00
  • Deed = $155.00
  • Mortgage = $205.00
  • Mortgage Foreclosure Deed & Affidavit = $155.00
  • Mortgage Discharge, Release or Partial Release (recorded after December 31, 2019) = $105.00
  • Municipal Lien Certificate (MLC) = $80.00 + $25.00 to order MLC.
  • UCC (Uniform Commercial Code) Documents = $75.00
  • Federal Tax Liens (and related documents) = $105.00
  • Plans (per sheet) = $105.00
  • Other documents (i.e. Trustee Cert, Easement) = $105.00 / document
  • Certified Copies (per page) = $1.00
• Earnest money deposit
• Tax adjustments
• Fuel, Water, Sewer adjustments
• Home Owner's Association fees
• Loan origination fee = 1% or 2% of the purchase price or,
• Loan discount = 1% or 2% of purchase price
• Appraisal fee = +/- $450.00
• Application fee = +/- $350.00
• Credit report = +/- $85.00
• Inspection fees - if not P.O.C.
• Title Insurance - Owner's and Lender's
  • Owner's = Approximately $3.50 / $1000.00
  • Lender's = +$100.00 if it is a simultaneous policy, otherwise $2.50 / $1000.00
    
  • Note: Insurance costs mary vary depending upon the provider.
• Survey Mortgage Plot Plan= $400.00 - $650.00
• Interest for the month
• Escrows for Hazard Insurance and Taxes
• Mortgage insurance premium
• Hazard insurance premium

The list goes on . . .
Some items may be marked "P.O.C.", which means they are "paid outside of closing" and the buyer or seller may pay these costs prior to settlement. Examples are home inspections (Buyer), Title-5 wastewater system inspection (Seller), credit report, appraisal, etc. Generally, you can figure that closing costs will be about 4% to6% of the Purchase Price of the property. If you want to try calculating an estimate on your own, try this Closing Costs Calculator