Know Before You Owe: Practical Implications for Lenders

Adopted by the Consumer Financial Protection Bureau (CFPB) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the new rules combine the disclosure requirements contained in the Truth in Lending Act (TILA) and the RESPA. The TILA/RESPA Integrated Disclosure rules — known as the TRID rules in the industry — provide borrowers with critical information about their mortgages in advance of closing.

Instead of sifting through multiple documents to determine the loan amount, loan term, interest rate, monthly payment, Private Mortgage Insurance requirements, and closing costs, borrowers can find this information on the first page of the new Closing Disclosure Form (CD). The TRID rule also combines the Good Faith Estimate (GFE) and initial Truth-in-Lending (TIL) disclosures into a single disclosure called the Loan Estimate (LE).

Under the TRID rules, a lender must provide an LE no later than three business days after receiving a completed application, and the borrower must receive it no later than seven business days before closing. The borrower must receive the CD at least three business days before closing. Once the lender issues the CD, it may not change the loan estimate.

The TRID rules raise some significant practical issues for mortgage lenders —particularly the three-business-day notice requirement for the CD. To meet this requirement, lenders must mail the form at least seven business days before closing or use other methods (such as electronic, express, or hand delivery) to get the form into the borrower’s hands on time. This is a significant departure from current practice, under which borrowers typically receive a HUD-1 settlement statement the day before the closing. 

The concern here is that problems discovered during the final walk-through may require the lender to revise the CD, triggering a new three-day waiting period and delaying the closing. The CFPB’s director has attempted to ease this concern, commenting that the TRID rules trigger a new waiting period only if the lender: 1) increases the APR by more than 1/8 percent (1/4 percent for “irregular” transactions, such as certain variable-rate loans), 2) adds a prepayment penalty, or 3) changes the basic loan product (from fixed-rate to variable-rate, for example). But many in the industry believe that resolving certain issues discovered in a walk-through may cause the APR to increase by more than the stated threshold.

Another potential issue involves the LE. The TRID rules allow lenders to increase their fees based on certain changed circumstances, but in most cases the only way to do so is through the loan estimate. But what if a lender learns of such circumstances after it has issued the CD, when it’s too late to change the LE? The lender’s only options are to bear the increased cost itself or deny the loan.

Unfortunately, unless the CFPB amends the rules, lenders can’t do much to avoid these issues. One potential solution is to conduct walk-throughs before the CD is issued, but that won’t be feasible in many cases due to time constraints. 

To minimize delays caused by the TRID rules, lenders should work closely with their business partners — including realtors, attorneys, and title companies — and be prepared to react quickly in the event a walk-through reveals issues that affect a loan’s terms.

Between now and October 3, mortgage lenders should prepare for the TRID rules by: