In October a new set of regulations came into effect for residential mortgages. In the real estate business, they’re commonly referred to as the TRID rules (for TILA-RESPA Integrated Disclosure), and apply to virtually all residential mortgages initiated in the U.S. after Oct. 3rd. The rules, under development for the past few years, were implemented to protect consumers in the mortgage process, and eliminate some egregious practices. In a nutshell, the new rules are designed to make loan terms clearer to borrowers, and prevent any last minute surprises, like changes in loan terms or unexpected calls for borrowers to come up with extra cash to close.
The intent of TRID is good. Borrowers have to be provided with a more complete Loan Estimate by a lender before a lender can finalize a loan application and charge any application or appraisal fees (other than a modest fee for a credit check.) The Closing Disclosure, outlining the loan terms and all closing costs, has to be given to borrowers in sufficient time so they have a minimum of three days to review before closing. Under the previous rules, buyers often wouldn’t see a closing statement until the day before the closing, or even at the closing table, and occasionally mortgage documents would arrive with terms that were different than what the borrowers initially agreed to.
This is wholesale overhaul of major parts of the mortgage process, with new forms, new rules for compliance, disclosure and notification, and new terms. Lenders and title companies have had to do major revamps of software systems. Real estate attorneys have to adjust to changes in the closing process. Everyone is feeling their way, and there have been some bumps. Lenders, in particular, are being very conservative in their interpretation of the new rules because for penalties for violations are pretty severe.
So how does this all affect you, a borrower? At the front end, there’s the timing of your mortgage application and rate lock. When you apply for a mortgage, the lender needs to provide you with a Loan Estimate within 3 days of taking your application and you need to indicate your Intent to Proceed before they can take an application or appraisal fee. That Loan Estimate, though, only has a ‘shelf life’ of ten days. So if you start the mortgage process, but don’t want to finalize the loan application until you have fully executed contracts (which here in Sullivan County often takes more than 10 days), the lender has to reissue the disclosure. Also, if you delay locking your rate until some point after finalizing the application, which is common here because of the often lengthy closing process to avoid a rate lock extension fee, and the rate has changed from your initial application, the lender will need to re-disclose. Likewise, if you change the type of loan along the way, say from a 30 year fixed to a 7/1 ARM, it will also trigger a new redisclosure and acknowledgement process.
The bigger issue for borrowers is at the back end. Borrowers must be provided with the Closing Disclosure in sufficient time to have 3 business days to review prior to closing. There are pages of rules regarding delivery and receipt methods to meet the 3 day review requirement. Some lenders are using the broadest requirement — putting the disclosure in the U.S. mail at least 7 days prior to closing. 4 days seems to be the minimum, using overnight FedEx or electronic delivery with esign acknowledgement. This means that final closing numbers have to be sent to the lender at least 5 to 8 days before the closing. That’s all well and good, but there’s a gotcha with this longer notification period. Say you have a 60 day rate lock that expires on Jan. 15, but your file isn’t fully cleared to close until Jan. 12 because your attorney is waiting for a final survey which the lender needs to review, or the title company is waiting for a municipal violation to be cleared (both of which are not uncommon). There isn’t sufficient time in this scenario to provide you with the required Closing Disclosure in time for a Jan. 15 closing. Some lenders will give you a ‘free’ grace period on a rate lock, but many won’t. So if you don’t hit the Jan. 15th rate lock expiration date for the closing, you may be subject to a rate lock extension fee or a change in the rate (which is a change in the terms of the mortgage.) I’ve read a number of articles online about this scenario, and it’s pretty muddy about how this will be handled. This scenario has even garnered a name — the black hole
As lenders get more experience with all of this, we may seem some changes in the loan products to more accommodate different scenarios. For example, because of the disclosure notification requirements at both ends of the process, maybe we’ll start seeing 75 day rate locks (rather than the currently available 60 day maximums.) Or possibly we’ll see rate lock extension fees more widely disclosed upfront as part of the Loan Estimate process, so they can be incorporated into the Closing Disclosure if they have to kick in, without a redisclosing the Loan Estimate. I don’t know the answers to these questions, but these gray area situations are inevitably going to cause a lot of head scratching over the next few months, until lenders get a firm grasp on the rules.
Over the past month, every closing I’ve had involving a mortgage that falls under the TRID rules has been delayed or rescheduled because of TRID compliance issues. Once a file is ‘cleared to close’ by the lender, the closing gets scheduled and then the Closing Disclosure is prepared. The reason that the closing date needs to be set first is that a lot of the numbers on the Closing Disclosure are specific to the actual closing date, like prepaid mortgage interest and tax pro rates. But it seems like lenders aren’t able to prepare the required Closing Disclosure as fast as they expected, so can’t meet the notification deadline and the closing has to be postponed. It’s been a huge headache and inconvenience, particularly for buyers and sellers who may have to arrange time off from work or coordinate child care.
I expect this will smooth out over the next few months, as lenders, real estate attorneys and title companies gain more experience with the new process. But for now, the road still has a lot of potholes.