Friday, April 1, 2016

TRID, explained

In October 2015, the real estate industry had a new rule to deal with. The anticipation for the new Consumer Financial Protection Bureau’s (CFPB’S) TILA-RESPA Integrated Disclosures rule, or TRID, was weighty, and nobody knew what to expect. Would the CFPB delay implementation? (Yes, as it turned out.) Would the new rules cause closing delays? (Jury’s still out.)

Where did TRID come from, why was it necessary, what is its purpose and how effective has it been? Read everything you ever wanted to know about TRID.

What is the TRID/Know Before You Owe rule?

The rule’s formal name as proposed by the CFPB is the TILA-RESPA Integrated Disclosure rule. Although the industries affected by the rule quickly adopted the acronym “TRID,” the CFPB has since stated that it prefers to call the rule the “Know Before You Owe mortgage initiative.”

Whatever you choose to call it, the rule is “designed to empower consumers with the information they need to make informed mortgage choices,” according to the CFPB. TRID replaces four borrower disclosure forms with two new ones, the Loan Estimate and the Closing Disclosure, and it requires creditors to give consumers three business days to review the Closing Disclosure and ask questions before the loan closes.

The CFPB hoped that by implementing TRID, consumers would be encouraged to comparison shop for mortgages, and the rule would make it easier for them to compare and contrast their loan options.

Wait, back up — what is the Consumer Financial Protection Bureau (CFPB)?

What does the CFPB do?

The Consumer Financial Protection Bureau is an independent U.S. government agency charged with overseeing consumer protection in the financial sector.

The CFPB has publicly said that it considers itself to be “a cop on the beat to patrol the consumer financial services markets.” The bureau acts as a watchdog over a wide range of other consumer financial products and services, including mortgage loans, credit cards, student loans, automobile loans, payday loans and debt collection.

It writes rules and regulations, enforces federal consumer financial protection laws, supervises financial services companies, fields consumer complaints, promotes financial education, researches consumer behavior and restricts unfair, deceptive or abusive acts or practices.

What is its origin story?

The agency traces its roots back to 2007, when then Harvard Law School professor Elizabeth Warren — now Massachusetts senator — first proposed it in response to the financial crisis of 2007-2008 and recession (and real estate market crash).

The CFPB’s creation was authorized by Congress’ passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The bureau formally opened the doors to its Washington, D.C., offices on July 21, 2011, with former Ohio Attorney General and Ohio State Treasurer Richard Cordray serving as director.

But if Elizabeth Warren proposed it, why isn’t she the director?

Although Warren proposed and established the CFPB, she was controversially removed for consideration from the director nomination when officials in President Barack Obama’s administration voiced concerns that she would not be able to “overcome strong Republican opposition” to the bureau’s intent and activities.

How does the CFPB relate to housing?

One of the CFPB’s biggest priorities is to make the mortgage marketplace safer and more accessible to Americans. The bureau inherited the regulatory authority over the mortgage and housing industries from the U.S. Department of Housing and Urban Development (HUD), including oversight of the Real Estate Settlement Procedures Act of 1974 (RESPA).

Any investigations initiated by HUD but not completed before it was absorbed by the CFPB were transferred to the bureau. Some of those investigations have been completed by the CFPB, and many are still ongoing.

How does the real estate industry feel about the CFPB?

Some real estate and mortgage industry professionals have criticized the CFPB for having inadequate and poorly trained staff.

Critics also ding the CFPB for “regulating by enforcement,” or making its positions on certain industry practices known by issuing consent orders, enforcement actions and entering into settlements with companies and individuals it deems to be in violation of the law to make an example of them, instead of issuing industry guidance and policy statements in the manner that HUD sometimes did.

How many people work at the CFPB, and what kind of budget does it have?

The CFPB has about 950 employees, and its 2017 budget is about $636.1 million.

Why and when did the CFPB issue the TRID rule?

What was TRID supposed to accomplish?

The clue is in the name: TRID stands for TILA-RESPA Integrated Disclosures. The rule was intended to consolidate and integrate two disclosure forms into one single, simpler disclosure:

  • The Truth In Lending Act (TILA) disclosure
  • The Real Estate Settlement Procedures Act of 1974 (RESPA) disclosure

Why did that need to happen?

After examining what went wrong with the financial crisis, recession and housing market crash, the federal government felt that the mortgage application process, which had been in place for more than 30 years — and which required lenders to provide consumers with TILA and RESPA disclosures at or shortly before a loan closing — was in need of an update.

After Congress concluded that those forms contained overlapping and inconsistent language and information, it wrote a provision in the Dodd-Frank Act requiring the CFPB, within a year after formally beginning operations, to propose rules that would combine the TILA and RESPA disclosures into a single, integrated disclosure.

How did the government decide how to combine the two disclosures?

The U.S. Department of Treasury hosted a mortgage disclosure symposium in 2010 that brought together consumer advocates, affected industries and others to discuss implementation of the combined disclosures.

Meanwhile, as the CFPB worked to become fully functional, it soon realized that one of the top consumer complaints it received was that the homebuying process was “overwhelming and confusing.” Consumers told the CFPB they often felt that closings are “rushed” and they weren’t given enough time to review and understand their closing documents before signing them.

With a pledge to consumers to “ease the process of taking out a mortgage, helping you save money and ensuring you know before you owe,” the CFPB first put pen to paper in February 2011 and began sketching prototype forms.

How were those prototypes tested/evaluated?

For about a year, the bureau tested the prototype forms on both consumers and industry, tweaking them in response to their feedback.

The CFPB also considered how its proposals would affect real estate agents, mortgage lenders, title/settlement/escrow agents and others, and was particularly concerned with how they may affect small businesses.

How was TRID rolled out to the public and the industry?

How does rulemaking usually work?

In a typical U.S. federal rulemaking, an agency publishes its proposed regulation in the Federal Register and seeks public comment. Depending on the complexity of the rule, comment periods can last from 30 to 180 days.

Agencies then publish full responses to issues raised in the public comments and may publish a second draft proposed rule in the Federal Register if the new draft differs greatly from the original draft and raises new issues that may require further public comment.

If no further steps are taken by the public or interested parties, the proposed rule is codified into the Code of Federal Regulations.

What was the first “draft” of TRID and what did it look like?

On July 9, 2012, the CFPB issued a “Notice of Proposed Rulemaking” and request for public comment.

The 1,099-page document outlined the CFPB’s reasoning in designing the Loan Estimate and Closing Disclosure forms and provided samples of the forms for different types of loan products and explanations of how they should be filled out and used.

How long did the public have to comment, and how many comments were received?

The CFPB gave the public about five months — until Nov. 6, 2012 — to submit comments. Between the public comment period and other information for the record, the CFPB reviewed nearly 3,000 comments.

How did TRID change after the initial comments?

The bureau validated its testing of the new disclosure forms by conducting a quantitative study of the new forms, developed Spanish-language versions of the forms and developed and tested different versions of the disclosures for refinance loans.

When was the final rule published?

On Nov. 20, 2013, the CFPB published the final, 1,888-page TRID rule and set an effective date of Aug. 1, 2015 for implementation of the regulation. This date was later changed to Oct. 3, 2015.

What were some of the industry’s concerns or common criticisms about the TRID rule prior to implementation?

The length of the actual rule

The rule’s preamble alone, which described 44 years of mortgage industry regulation and provided context for the proposed changes, ran nearly 1,400 pages. When printed, the rule weighed about 15 pounds.

Many companies — especially small businesses with fewer resources than large mortgage entities — complained about the difficult-to-digest text, especially in light of their efforts to adjust and comply with several other complex mortgage industry regulations that were released prior to TRID.

Real-world implications

Many felt that the rule’s exhaustive text still didn’t contemplate how the new disclosure forms and procedures would would work in some real-world scenarios.

The CFPB acknowledged that it would be impossible to address every nuance in the mortgage transaction process, and the bureau pledged to collect some of the most frequently asked questions and issue more specific interpretations and guidance as needed.

Technology challenges

In early 2015, many industry professionals began voicing concerns about whether their loan origination and management software providers would be able to make the necessary changes and updates to their systems to accommodate processing of the new forms.

Some providers weren’t expecting to deliver these updates until spring 2015, leaving only a few months for companies to learn how to use the new system, beta test it and work out any kinks.

Some companies that did receive their upgraded systems well ahead of the TRID implementation date reported that they were encountering bugs and errors.

And finally, many were worried about the logistical nightmare of operating two systems simultaneously, as any loan application taken before the implementation date, but not closed before then, would have to be processed using the older system and disclosure forms.

Expense

Digesting such a complex rule, training employees on how to comply with the new disclosure forms and processes and deploying software changes — all while operating “business as usual” — proved to be an expensive challenge for a lot of companies, particularly smaller companies that don’t have the hefty compliance resources and experts that large, national companies have.

Timing

The CFPB released the TRID rule at a time when the mortgage industry and its associated industries were already grappling with a slew of other regulations and regulatory changes, including:

  • The Ability-to-Repay and Qualified Mortgage (ATR/QM) rule
  • The Home Mortgage Disclosure Act (HMDA)
  • The Home Ownership and Equity Protection Act (HOEPA)

Lender liability issues

Because the CFPB placed responsibility for TRID compliance on mortgage lenders, real estate agents, title and settlement professionals, escrow agents and other third parties were concerned about how this would affect their relationships with their lender partners.

Before the implementation date, some lenders began vetting their third-party providers for their ability to demonstrate that they could adhere to the lenders’ standards. Smaller companies worried that they would get pushed away in favor of larger companies with more compliance resources and transaction volume.

Some compliance experts even raised questions about whether lenders’ reaction and their “preferred provider” lists would eliminate or interfere with consumers’ right to choose their settlement service providers, resulting in RESPA violations.

Why did the CFPB change the original implementation date for TRID?

Not enough time to prepare

From early to mid-2015, the affected industries began to voice concerns that many providers would not be ready to process loan applications using the new forms and systems by the Aug. 1, 2015, implementation date.

Many companies said their loan origination software providers were either behind in developing the necessary software upgrades or struggling to work out technical glitches.

Small companies such as rural credit unions said they were struggling to find the time and resources to devote to preparing to comply with the complex rule.

The affected industries asked the CFPB to consider delaying TRID’s effective date, and some organizations even backed legislative efforts to push the date off.

What happened to those efforts?

They fizzled out in the 2015 legislative session, and the CFPB refused to budge, with Director Richard Cordray firmly stating on several occasions that the bureau gave everyone nearly two years to prepare for the changes.

When did the CFPB change its mind?

On June 24, 2015, the affected industries got their wish granted when the CFPB issued a proposal to push TRID’s effective date to Oct. 3, 2015.

Why did the CFPB delay implementation?

The bureau said its decision was intended to correct an “administrative error” that would have delayed the effective date by at least two weeks — but many were skeptical of that explanation and believed that persistent concerns about delayed loan origination software rollouts finally tied the CFPB’s hands.

The CFPB conceded that “moving the effective date may benefit both industry and consumers with a smoother transition to the new rules,” and “believes that scheduling the effective date on a Saturday may facilitate implementation by giving industry time over the weekend to launch new systems configurations and to test systems.”

Whatever the reason for the delayed effective date, the affected industries were grateful to have an additional two months to prepare for the changes.

After a several-year effort, TRID finally became the law of the land on Oct. 3, 2015, with all mortgage applications initiated on or after that date processed using the new forms.

How did the industries affected by TRID prepare for it?

What did the CFPB do to help industries prepare for TRID?

In consideration of the complexity of the TRID rule and the overhaul of a mortgage transaction process that had been in place for more than 30 years, the CFPB in its original rulemaking gave the affected industries about 21 months to read and digest the regulation, train their staffs and make adjustments to their loan processing software to accommodate the new forms.

The bureau also created a Web page containing educational and training resources for the affected industries, including sample forms and a Small Entity Compliance Guide.

It also held several webinar training sessions to discuss real-world applications of the forms and field frequently asked questions.

What did industry trade groups do to prepare for TRID?

Most industry trade groups held educational and training sessions of their own, sometimes working together across the different real estate, mortgage and settlement services segments.

The bulk of these efforts were led by the American Land Title Association (ALTA), the national trade association and voice of the abstract and title insurance industry.

How has TRID changed the way mortgage transactions are conducted?

What specifics has TRID changed about the process?

TRID requires lenders to use the new disclosure forms, sets forth deadlines for when the forms must be given to the consumer and limits by how much the final deal can deviate from the original loan estimate.

What is the Loan Estimate?

The Loan Estimate (LE) replaces the early Truth in Lending (TIL) statement and the Good Faith Estimate (GFE) and provides a summary of the key loan terms and estimated loan and closing costs.

Lenders must provider the LE to consumers within three days after they submit a loan application containing the following information:

  • Name
  • Income
  • Social Security number
  • Address of home to be purchased
  • Estimate of the home’s value (typically the sale price)
  • Amount applicant wishes to borrow

Issuing an LE does not mean that the lender has approved or denied the loan; it only means that the lender has committed to honoring the fees described in the LE, as long as the loan is later approved without any changes in circumstance affecting the loan application.

What happens after the borrower gets the Loan Estimate?

After receiving the LE, the borrower must inform the lender that he wishes to proceed. Lenders have established different requirements setting forth what a client must do in order to indicate that intent.

Lenders cannot charge any fees, including application or appraisal fees, until clients indicate their intent to proceed; the only fee lenders can charge at this point is a reasonable fee for a credit report.

After 10 business days with no indication, the lender is no longer required to offer the terms initially offered in the LE. If the lender closes the application, the borrower will need to start over from the beginning.

What happens when the client states an intent to proceed, and what if the Loan Estimate needs to be revised?

Once a client indicates they intend to proceed, lenders may require payments for an appraisal, application or other loan processing fee. In some circumstances, an LE may need to be revised.

Common reasons for issuing a revised LE include:

  • The client decided to change loan programs or the amount of the down payment.
  • The appraisal on the home came in higher or lower than expected.
  • The client’s credit status changed, perhaps owing to a new loan or a missed payment.
  • The lender could not document overtime, bonus or other income provided on the client’s application.

What is the Closing Disclosure?

The Closing Disclosure (CD), which replaces the final TIL statement and the HUD-1 settlement statement, comes into play after the consumer has indicated intent to proceed, providing a detailed accounting of the transaction.

When do consumers see the Closing Disclosure and what does it include?

Consumers must receive the CD three business days before closing on a loan.

The CD must contain the buyer’s and the seller’s real estate brokerages’ and agents’ names, addresses, state license ID numbers, email addresses and phone numbers. If this information is unknown, the form can’t be completed.

What happens if there are last-minute changes to loan terms?

Any significant changes to loan terms will require the lender to issue a revised CD, triggering a new three-business-day review period.

The CFPB has said that last-minute changes are unlikely and would most likely involve:

  • An increase in annual percentage rate (APR) by more than 1/8 of a percent for regular, fixed-rate loans, or 1/4 of a percent for adjustable loans.
  • A prepayment penalty being added, making it expensive to refinance or sell.
  • Changes to a basic loan product, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.

How are the documents retained for records?

Creditors must retain copies of the CD and all related documents for five years after consummation; Creditors/servicers must retain the Post-Consummation Escrow Cancellation Notice (Escrow Closing Notice) and the Post-Consummation Partial Payment Policy disclosure for two years.

For all other evidence of compliance with the integrated disclosure provisions, including the LE, creditors must maintain records for three years after consummation of the transaction.

What happens if the creditor sells the mortgage and doesn’t service it?

If a creditor sells, transfers or otherwise disposes of its interest in a mortgage and does not service the mortgage, the creditor must provide a copy of the CD to the new owner or servicer of the mortgage as a part of the transfer of the loan file.

Both the creditor and this new owner/servicer must retain the CD for the remainder of the five-year period.

What hasn’t changed about the mortgage process?

Does TRID apply to preapprovals or prequalifications?

TRID does not make changes to preapprovals or prequalifications.

Does TRID apply to reverse mortgages, HELOCs or other loans?

TRID doesn’t apply to:

  • Reverse mortgages
  • Home equity lines of credit (HELOCs)
  • Chattel-dwelling loans, such as loans secured by a mobile home or by a dwelling that is not attached to real property
  • Loans made by a creditor that makes five or fewer mortgages in a year

For these types of mortgages, creditors must continue to use the Good Faith Estimate (GFE), the HUD-1 Settlement Statement and Truth in Lending Act (TILA) disclosures, as applicable.

What other exemptions exist?

There is a partial exemption for certain transactions associated with housing assistance loan programs for low- and moderate-income consumers.

How has the rule impacted the real estate, mortgage and settlement service industries — and consumers ?

Initially, TRID impacted those industries and consumers in positive and negative ways.

Did TRID cause delays?

On the real estate side, real estate agents had expected — and were advised to prepare for — delays in the time it customarily takes to complete a mortgage transaction due to the prescribed deadlines and companies working with the new forms and rules.

Increased closing times of 30 days or more were anticipated, but in February, the National Association of Realtors (NAR) released a study finding that its members were experiencing an average delay of 8.8 days.

Did TRID cause problems acquiring documents, and how common were document errors?

NAR’s survey also found that:

  • In the first three months of TRID, 54.5 percent of respondents had problems getting closing documents for transactions
  • Half found errors when they did get access to closing documents
  • Realtors were less likely to have access to closing documents in delayed settlements
  • Missing concessions and incorrect names or addresses were the most frequently cited errors, but incorrect fees, commissions and taxes were also reported
  • E-settlement procedures had fewer errors and faster remediation

How were lenders affected by TRID?

Things were reportedly hairier on the lender side.

How widespread were TRID violations?

In December 2015, Moody’s Investors Services released a credit outlook report in which its analysts estimated that several third-party firms found TRID violations in more than 90 percent of the loans they audited.

Those observations were further validated a few months later, when a team of attorneys identified 10 of the most common mortgage application errors and problems.

What’s the problem with document errors and problems?

The attorneys also discussed the fact that investors were refusing to buy loans due to compliance problems and document errors — raising concerns about how this could ultimately affect liquidity in the mortgage market if these trends continued.

How have the struggles to comply affected the industry?

Struggling to comply with the rule, some lenders have begun winding down their mortgage operations or are even exiting the retail mortgage business altogether.

Transaction volume has played a part in those decisions; in February 2016, RealtyTrac said in its Residential Property Loan Origination Report that purchase loan originations during the fourth quarter of 2015 fell 24 percent quarter-over-quarter, the biggest quarterly drop in purchase originations in more than five years.

Is TRID better for consumers, though?

Whether the CFPB has succeeded in its mission of making the homebuying process simpler and easier to understand for consumers is up for debate.

Are consumers saving money?

In February 2016, the American Bankers Association (ABA) released the results of a post-TRID mortgage lender survey showing that some banks are so burdened by the complex regulation, they are charging higher mortgage loan fees to consumers — anywhere between $300 and $1,000 in additional costs.

In March 2016, real estate closing cost data and technology provider ClosingCorp released the results of a survey of 1,000 repeat homebuyers who compared their pre- and post-TRID homebuying experiences.

More than half of respondents encountered “unexpected costs, fees and surprises” in their post-TRID mortgage transactions.

Do consumers think the TRID forms are easier to understand?

Respondents to the ClosingCorp survey were about evenly split on whether the new LE and CD forms are easier to understand than the old forms, with 63 percent of respondents agreeing with that statement, and whether they felt that their costs and fees were explained better in their most recent experience, with 65 percent of respondents expressing agreement.

Did consumers shop for different service providers?

Of the 78 percent of buyers who said they were informed that they could shop for different service providers, 74 percent of that group said they shopped for providers, but only 55 percent of them saved money — somewhere between $1,000 and $5,000 — as a result.

And 57 percent of the respondents said the overall process of getting and closing a loan took more time in their most recent experience.

Is there any positive feedback on TRID?

In late March 2016, STRATMOR, a strategic advisory and consulting firm that serves mortgage lenders, released data from its MortgageSAT Borrower Satisfaction Program, finding that customer satisfaction was at 91 percent — the highest rate since STRATMOR started its program in 2013.

So six months into TRID, the jury is still very much out.

How does the CFPB assess companies’ compliance with TRID?

This has been a major point of contention between the CFPB and the industries affected by the TRID rule since the rule issued.

Does this have something to do with that “grace period” thing?

Very good! Due to the rule’s complexity and the significant changes it brought to the mortgage transaction, the affected industries requested that the CFPB adopt some sort of preliminary grace period during which those who made a “good-faith” attempt to comply with the rule would be held harmless for any errors or compliance problems.

This was something the bureau’s predecessor, HUD, agreed to do for the implementation of the reverse mortgage financial assessment rule in 2015 as well as the RESPA reform rule in 2010.

But there was no grace period, was there?

Correct; the CFPB staunchly refused to implement such a grace period, despite several industry trade groups attempting Congressional intervention.

The most the bureau would agree to was to be “sensitive” for an undefined period of time and take actions that are “diagnostic, not punitive” against companies that can show they are making a good-faith attempt to comply with the rule.

What resources does the CFPB make available to help with compliance?

The CFPB has published a Supervision and Examination manual outlining its assessment process, which is available here.

The CFPB also periodically issues Supervisory Highlights to apprise the public and the financial services industry about its examination program, including the concerns that it finds during the course of its completed work, as well as the remedies that it obtains for consumers who have suffered financial or other harm.

What triggers a CFPB investigation?

Past investigations have been initiated by consumer complaints, company failures, consumer lawsuits and even disgruntled former employees.

What happens when an investigation is triggered?

The CFPB typically provides written, advance notice to parties selected for examination and gives them 60 days to gather documents and submit them to the bureau’s examiners — however, notice is not required, and the CFPB may begin an examination with no prior notice given.

In general, if the CFPB initiates an investigation into a company’s practices, it will conduct a thorough examination to determine that:

  • The company has established procedures to ensure compliance
  • The company d