By Cory Loviglio, Quantitative Strategist, Auction.com Research
In October, the Truth in Lending and Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule—more commonly referred to as “Know Before You Owe”—went into effect, ushering in new regulations for the mortgage process. Enforced by the Consumer Financial Protection Bureau (CFPB), the rule is a by-product of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. Its aim is to simplify and add clarity to mortgage procedures for borrowers.
In this blog post, we’ll try to answer some of the most frequently asked questions about the rule.
Why was this rule created?
We’ve all heard the horror stories of predatory lending practices leading up to the housing bubble and its subsequent burst. While such extreme practices certainly existed, there were more common problems facing borrowers. Typical borrowers often didn’t understand complicated mortgage terms, which made it difficult for them to know exactly what they were signing up for. In addition, lenders were able to make changes to the loan terms right up until signing, potentially saddling borrowers with last-minute fees and rate changes for which they were unprepared.
In the aftermath of the housing crisis and Great Recession, regulators sought to curtail such practices and add more stability to the housing market. TRID was conceived to simplify loan terms and guarantee sufficient time for borrowers to review their mortgages before signing them, to ensure that borrowers make more educated decisions and to lower the chances of mortgage failures down the road.
What took so long?
After Congress passed Dodd-Frank in 2010 and established the CFPB in 2011, the rule itself was initially issued in 2013. The CFPB spent years developing the details, which included consumer testing and industry feedback, and needed to give mortgage companies sufficient time to prepare for the change. TRID was supposed to launch on August 1, 2015, but lenders—worried about trying to prepare for the rule during the busy summer selling season—requested more time to comply, so the implementation date was pushed to October 3.
So what does new rule actually do?
The rule streamlines disclosure documents into two forms, the Loan Estimate and Closing Disclosure, in order to simplify the terms for consumers. The forms include very simple “yes” and “no” answers to basic questions, and help disclose any fees or costs that may not have been obvious before.
Source: Consumer Financial Protection Bureau
TRID also requires that consumers receive the Closing Disclosure form three days prior to signing and accepting the terms of the mortgage. This allows consumers to ensure that there haven’t been any major changes from the Loan Estimate and if there are, give them a chance to review and ask why. Previously, lenders were required to provide a HUD-1 Settlement Statement 24 hours in advance only if the borrower specifically requested it. If there are any of three changes (as described in the next question) to the terms of the loan in the Closing Disclosure form, the three-day review period starts again.
What could cause additional delays in the closing process?
There are three events that can reset the review period to an additional three days:
- The APR increases by more than 1/8 of a percentage point for fixed-rate loans or 1/4 of a percentage point for adjustable loans (though this has been in effect since 2009). A decrease in APR will not reset the review period if it’s based on changes to the interest rate or other fees.
- A prepayment penalty is added to the loan terms.
- The basic loan product changes (i.e. the loan is changed from fixed-rate to adjustable-rate).
Who is concerned about the rule, and why?
Mortgage lenders have raised concerns about the time and money they’ve spent on implementing the rule. David Stevens, president of the Mortgage Bankers Association, claims that lenders have spent billions on associated technological changes and training, calling it “without question the single largest implementation challenge that the broad industry has faced since Dodd-Frank.” Since most lenders use massive legacy technology systems to manage document processing, and have compliance departments in place to monitor each step of the loan process, it is certainly a significant undertaking to make industry-wide changes.
Lenders are also concerned that resetting the three-day review period could delay closing, which could have a cascading effect. Delays to closing could add costs to the overall process, including the cost to extend rate locks, which raises the question of who pays for such increases. Rising costs resulting from implementation or delays could be passed onto borrowers, backfiring on an attempt to improve the position of the borrower.
But despite these challenges for lenders, they’re moving to implement the new regulations. Bill Emerson, CEO of Quicken Loans, remarked on implementation: “Clearly if we weren’t doing that, we’d have folks deployed on other projects, maybe things that would be innovative. But there’s no choice. You have to do it.”
Banks and lenders are subject to penalties if the conditions of TRID aren’t met, although the CFPB has pledged an initial grace period on punitive action as long as the spirit of the rule isn’t being violated intentionally.
What’s the overall outlook?
It seems that the rollout of TRID may be a little bumpy, as implementation delays could have a greater ripple effect. Lenders may struggle to adjust in the short term, with delays potentially impacting the industry, but in the long term TRID should provide more clarity and transparency to what has become an increasingly complicated lending process, and help consumers make more informed choices about their home loans. It’s clearly the CFPB’s hope that any short-term concerns will be far outweighed by the long-term stability these regulations can bring. The results remain to be seen, but TRID at the moment appears to be a step in the right direction for the mortgage industry.
