The effective date for implementation of the “TILA-RESPA Integrated Disclosure” rule, or “TRID” for short, is just around the corner – October 3rd. Originally the effective date was August 1st but that date was extended by the CFPB to October 3rd (re my July 23 post for the reason for the delay to October 3rd). Today’s blog post is a brief follow up to my July 23 entry about TRID in which I delve into the origins of the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). The point of today’s post is to simply underscore what TRID is and what it’s supposed to accomplish in a very general sense before the October 3rd “effective date” arrives, and it’s geared for those who aren’t directly involved in the mortgage industry (believe me, everyone in the mortgage industry knows full well what TRID is!). And let me add that this post is by no means an analysis of the TRID rule – that thing weighs in at over 1,800.
As a quick aside, early on the CFPB was referring to TRID as the “Know Before You Owe Mortgage Disclosure” rule. That term, while catchy and indicative of its underlying purpose, is too much of a mouthful. So is the more accurate reference, the “TILA-RESPA Integrated Disclosure” rule, which has a mind-numbing ring to it. For the most part, we’re just going to stick with the term “TRID” since that’s how everyone refers to it though I’ll also continue to make references to the “TILA-RESPA Integrated Disclosure” rule for context. Just remember, TRID, the “TILA-RESPA Integrated Disclosure” rule, and the “Know Before You Owe Mortgage Disclosure” rule all mean the same thing.
A couple of general points: First, TRID applies to consumer residential mortgages – it isn’t applicable to commercial real estate transactions. Second, it’s essentially a new way of doing what is already required in terms of providing estimates and disclosures in connection with mortgage loan applications and mortgage closings. However this “new way” isn’t simply repackaging the old requirements. As anyone who’s in the mortgage industry and prepared (or perhaps not prepared) for October 3rd will tell you, there are new requirements that will significantly impact how closings are handled going forward.
First things first: In the context of mortgage closings, including the credit application process, TRID and its requirements are designed to replace the existing set of requirements for compliance with TILA and RESPA. Let me be clear on this point: As noted in my July 23 posting, TILA and RESPA aren’t being replaced by TRID; rather, TRID is simply the new framework of requirements for compliance, and the process for compliance, with TILA and RESPA in the mortgage application and closing context. Additionally, TRID is supposed to integrate this process for compliance under TILA and RESPA, hence the cumbersome reference, the“TILA-RESPA Integrated Disclosure” rule. Compliance with TILA and RESPA was supposed to result in clarity and full disclosure to consumers with regard to costs of credit, terms of credit, and costs associated with the mortgage closings. But there have always been grumblings that clarity and full disclosure weren’t being accomplished. So TRID was developed by the CFPB with input from the mortgage industry and other interested parties, and has been in development for two years (conceptually it’s been in development well over two years). Theoretically, TRID is supposed to accomplish the goals of TILA and RESPA in a clearer, more streamlined manner and in a way so that the borrower isn’t looking at the costs and fees associated with the closing one day before the closing commences.
Let’s start with the “TILA” component of the TILA-RESPA Integrated Disclosure rule. TILA, or the Truth in Lending Act (originally Title I of the Consumer Credit Protection Act), was passed in the 60’s, to provide full disclosure of consumer credit terms. The text of the Long title reads: “An Act to safeguard the consumer in connection with the utilization of credit by requiring full disclosure of the terms and conditions of finance charges in credit transactions or in offers to extend credit…” It’s sometimes referred to generically as “Regulation Z” or “Reg Z” which is the regulation issued by the Board of Governors of the Federal Reserve System to implement TILA.1 Reg Z states “[t]he purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The regulation also includes substantive protections. It gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling…”2 Reg Z also regulates other areas of consumer credit, such as credit card practices, but the important thing to know for our purposes in this discussion of TRID is that TILA requires that a lender provide disclosure to a borrower about the costs of credit – what it’s actually going to cost the borrower to finance the purchase or re-finance of the borrower’s home. If you’ve sat through a mortgage closing, you may recall a TILA Disclosure Statement which explains what your interest rate is and how much you will have to pay over the life of the loan (so that you will know the actual rate of interest that’s being charged, the monthly payment amount, and understand to your dismay that you may be repaying in the order of tens of thousands of dollars more over the life of the loan than the stated principal amount--that’s how interest and amortization work).
Now for the “RESPA” component of the TILA-RESPA Integrated Disclosure rule (as a quick aside, you may have heard the terms “Regulation X” or “Reg X” as a shorthand reference for RESPA. The Department of Housing and Urban Development (HUD) promulgated Regulation X, which is now codified at 12 U.S.C. Pt. 1024, to implement RESPA. That’s where the generic references “Regulation X” and “Reg X” came from). As noted in my July 23 post, leading up to the passage of RESPA, Congress had become increasingly worried that consumers were being duped and overcharged for settlement services for residential real estate mortgage loan closings. The “findings” portion under the “Congressional Findings and Purpose” of RESPA legislation provides that “[t]he Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country.”3 The “Purpose” portion of RESPA provides “[i]t is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result--(1) in more effective advance disclosure to home buyers and sellers of settlement costs; (2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services; (3) in a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance; and (4) in significant reform and modernization of local recordkeeping of land title information.”4 One of the biggest concerns of RESPA was # (2): “the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” That was a persistent problem prior to RESPA (and is still a problem occasionally, as noted in some recent CFPB enforcement cases). RESPA was supposed to address this problem by mandating transparency and full disclosure with respect to services and costs in connection with a mortgage closing. Again, if you’ve ever sat through a mortgage closing, you’ve seen a HUD-1 Settlement Statement which is supposed to summarize the charges and credits to the buyer and seller, set forth the loan amount, list the amounts collected by the lender to be placed in escrow for future payments, and itemize the fees and costs in connection with the closing (such as for the survey, appraisal, credit report, commission paid to real estate agent, loan origination charge, etc.)5 The reality is, while a HUD-1 does list all of these things, it can be quite confusing to anyone seeing a HUD-1 for the first time which, pre TRID, has oftentimes been just a day before the closing.
OK—back to TRID. TRID imposes new requirements which include consolidating the documentation for the mortgage closing and imposing disclosure deadlines. According to the CFPB, TRID “primarily does two things: 1) It simplifies and consolidates some of the required loan disclosures, and 2) It changes the timing of some activities in the mortgage process.”6 For starters, there will be a new type of settlement statement called a “Closing Disclosure” that replaces the old HUD-1. This Closing Disclosure must be provided to a borrower at least three business days before closing -- the idea being that that will give the borrower time to review all the terms of the transaction well before the closing (as opposed to 24 hours before the closing). If there are some subsequent changes to the loan terms after the three business day countdown to closing begins, some changes will trigger a new 3-day review, some won’t. Without splitting hairs, changes that will require a new 3-day review include certain changes to the annual percentage rate or if the basic loan product changes (such as from a fixed rate loan to an adjustable interest rate loan).7 Practically speaking, we’ve heard that some lenders will require that the information in the Closing Disclosure be finalized and provided at least 7 days prior to closing, in case changes are needed and they need to generate a new Closing Disclosure before they hit the three business day deadline. I cannot emphasize enough that this will have—and is already having—a big impact on the mortgage industry, mortgage services industries, title industry, and closings practices. Everything mortgage services professionals do relating to mortgage applications, mortgage closings, the documents they use, and the overall policies and protocols they’re subject to, are having to be readjusted.
OK, if anyone wants to see the CFPB’s compliance guide or guide to forms for implementation of TRID, the CFPB has a “TRID” webpage where this stuff is downloadable.8It includes integrated loan disclosure forms and samples. At this point, with October 3rd only days away, this stuff is for the hyper-thorough consumer who’s about to apply for a mortgage and wants to learn more about TRID (or someone who simply wants to look at this stuff out of morbid curiosity). The people that actually work in the mortgage industry aren’t going to start simply downloading this stuff from the CFPB’s website once October 3rd rolls around--they’ve been working for many months (in some cases, years) to get their software in place, tested, and integrated for loan origination and document production to comply with TRID (or they’re scrambling to get to this point). It’s not an exaggeration to say they’ve been living and breathing this stuff for some time (as a quick aside, not surprisingly,TRID has been a boon for software vendors and consultants). Now, does that mean that everyone in the mortgage industry is going to be ready to comply fully with TRID when October 3rd arrives? That will be the grist for a post October 3rdblog post.