Mortgage Loans

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The TILA-RESPA Integrated Disclosure Rule became effective on October 3, 2015, and since that time, it has determined how estimated and actual loan costs are disclosed in transactions for closed-end mortgages that are secured by real property (12 C.F.R. §1026.19(e)(1)(i)).

The types of transactions that are subject to the rule include:

· Conventional closed-end home purchase loans

· Conventional closed-end refinances

· Non-conventional closed-end home purchase loans, including FHA loans and VA loans

· Non-conventional closed-end refinances

· Closed-end home equity loans

The TRID Rule does not apply to:

· Open-end mortgages, such as open-end home equity lines of credit

· Reverse mortgages

The goals of the TRID Rule are to:

· Provide consumers with more reliable estimates of loan and closing costs

· Offer estimates within a timeframe that allows borrowers to make informed decisions regarding mortgage debt

· Encourage borrowers to shop for settlement services

· Eliminate the surprise of unanticipated cost increases at the closing table

The first step towards TRID Rule compliance is to understand the definitions that the rule provides for the following terms:

· Application

· Business day

· Consummation

Understanding these terms is important because they determine when disclosure deadlines begin to run and how they are calculated.

Application: the three-business-day deadline for providing a Loan Estimate begins to run after a creditor receives an “application” for a mortgage. By definition, a complete application consists of the submission of the following six pieces of information:

· Loan applicant’s name

· Loan applicant’s Social Security number

· Loan applicant’s income

· Address of the property that will secure the mortgage

· Estimated value of the property

· Loan amount sought

(12 C.F.R. §1026.2(a)(3)(ii))

Even if a loan applicant fails to complete a Uniform Residential Loan Application (URLA) by providing information on his/her employment, assets, and liabilities, a creditor is deemed to have received an application when it has the six pieces of information listed above (12 C.F.R. §1026.19(e)(1)(iii)).

Business day: Regulation Z provides two definitions for “business day.”

Under the first definition, “business day” means any day on which the creditor’s offices are open to the public for carrying out substantially all business functions. This definition is used for purposes of determining:

· The three-business-day deadline for providing a Loan Estimate after receiving a consumer’s application for a mortgage

· The three-business-day deadline for providing a revised Loan Estimate after receiving information that requires or permits a revised estimate

· The ten-business-day expiration period for a Loan Estimate

Under the second definition, “business day” means all calendar days except Sundays and legal public holidays, which include New Year’s Day, Martin Luther King’s birthday, George Washington’s birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran’s Day, Thanksgiving, and Christmas (12 C.F.R. §1026.2(a)(6)). This definition is used for purposes of calculating:

· The seven-business-day waiting period that must elapse between the date that a creditor mails or otherwise delivers a Loan Estimate and the date of consummation

· The three business days that are assumed to elapse between the mailing of a disclosure and a loan applicant’s receipt of it

· The four-business-day waiting period between a consumer’s receipt of a revised Loan Estimate and consummation

· The three-business-day waiting period that must elapse between a consumer’s receipt of a Closing Disclosure and consummation

There is an easy way to remember the distinction between these two definitions. When counting the number of days that a creditor has to prepare a Loan Estimate or a revised Loan Estimate, it is logical to count only those days when an originator is in the office to perform the work required to complete the disclosure of estimated costs. For example, creditors are required to provide a Loan Estimate within three business days of receipt of a loan application, and Saturdays are not counted if an originator’s office is not open on that day. The second definition of “business day” is related to the delivery of a disclosure and corresponds with the days that the U.S. Postal Service is open for normal mail processing and delivery.

Consummation: the time that a consumer becomes contractually obligated on a credit transaction (12 C.F.R. §1026.2(a)(13)). State law determines when a consumer is subject to the contractual obligations under a lending agreement. Often, the closing date and the date of consummation are the same. Identifying the consummation date is of critical importance when determining:

· Whether the three- or four-business-day waiting periods prior to consummation have elapsed, and

· When the 30- or 60-day deadlines begin to run for post-consummation disclosures

· Throughout the course, the terms “loan applicant” and “consumer” are used synonymously. “Consumer” is the term that the TRID Rule uses to refer to individuals who are applying for mortgage credit. Despite the use of this term in the regulations, the model forms make use of the term “borrower” to refer to loan applicants.

· The ultimate goal of the TRID Rule is to ensure that creditors provide loan applicants with reliable or “good faith” estimates of the costs associated with a mortgage. Estimated costs are made in good faith when charges paid by or imposed on a consumer do not exceed the amounts disclosed on the Loan Estimate (12 C.F.R. §1026.19(e)(3)(i)). Although this regulation seems to prohibit an increase in estimated costs, variances between some estimated and actual costs are permitted.

· The TRID Rule establishes three tolerance levels for variances between estimated and actual charges.

Generally, no variances are permitted for fees controlled by or known to the creditor. For example, no variance is permitted for fees charged by a creditor or one of its affiliates. Other fees that are subject to a zero tolerance include, but are not limited to:

· Fees paid to a provider of settlement services if the loan applicant is not allowed to shop for settlement services

· Fees paid to a mortgage broker

· Fees paid for transfer taxes

(Official Interpretations, 1026.19(e)(3)(i)(1.))

Increases in estimated charges for third-party settlement services are permitted when:

· The aggregate amount for third-party services does not exceed estimated aggregate charges by more than 10%

· The charges for third-party services are not paid to a creditor or to one of its affiliates, and

· The creditor allows the consumer to shop for third-party settlement services

(12 C.F.R. §1026.19(e)(3)(ii))

Variances between the estimated and actual cost of certain charges are permitted if the estimated charge was based on “the best information reasonably available” to the creditor at the time the estimate was made (12 C.F.R. §1026.19(e)(3)(iii)). The exercise of due diligence is required in order for a creditor to demonstrate that an estimate was based on the best information reasonably available. The particular charges that are not subject to a tolerance limit include the following.

Prepaid interest: these are charges that borrowers pay at closing for interest that accrues between the closing date and the end of the month when the closing takes place. In order for this charge to fall within the category of fees that is subject to an unlimited tolerance, the creditor must base the calculation for prepaid interest on the scheduled closing date. For example, if a closing is scheduled for October 15, the prepaid interest must be calculated from that day and not from a later date, such as October 20.

Premiums for property insurance: this cost falls within the unlimited tolerance category when the need for insurance is not certain. For example, if a home is located in an area where floods occur but is not located in a flood zone where flood insurance is required, the omission of an estimate for flood insurance premiums is not a violation of the requirement to offer a good faith estimate of closing costs.

Amounts paid into an escrow account: although escrow amounts are listed as costs subject to unlimited tolerance, creditors must complete due diligence before estimating the cost of escrowed items, such as premiums for homeowner’s insurance and property taxes. Appropriate due diligence would include contacting insurance providers for estimates for the cost of a policy and contacting the local tax office to determine current property taxes.

Charges for consumer-selected third-party providers: if a consumer chooses a third-party settlement service provider that is not on the creditor’s list of recommended providers, the fees for that provider are not subject to tolerance limits.

Charges for optional products and services: fees paid to third-party providers for services and products not required by the creditor are not subject to tolerance limits. For example, consumers are not required to purchase title insurance for their own protection, but when choosing to do so, the estimated and actual costs of this insurance may differ.

The remainder of the course sections pertaining to TRID will review provisions of the TRID Rule that are relevant to closed-end transactions for fixed-rate mortgages, and will do so within the context of a scenario that describes a fictitious transaction between client and Mortgage Company. When reviewing the scenario, assume that:

· Mortgage Company is not open for business on Saturday, therefore, Saturdays are not “business days” and are not counted when calculating deadlines for providing Loan Estimates and revised Loan Estimates

· The transaction is taking place in a state where the closing date and consummation of the loan occur on the same day

· The four-business-day waiting period may turn into a wait of seven business days when a revised disclosure is mailed, and this is because a consumer is deemed to receive a revised Loan Estimate three business days (including Saturdays) after a creditor mails the revised estimate.Content

· When creditors deliver initial or revised Loan Estimates by other means, such as direct delivery or email, they may begin calculating the four-business-day waiting period on the day that direct delivery is made or on the day they receive an email confirming receipt of an electronically-transmitted disclosure. For example, the CFPB states in its official commentary that if a creditor emails a Loan Estimate on a Tuesday at 1:00 p.m. and the consumer acknowledges receipt of it at 5:00 p.m., the creditor can demonstrate that the consumer received the disclosure on the date of the same day that it was transmitted (Official Interpretations, 1026.19(e)(1)(iv)(2.)).

As a good faith estimate of closing costs, an official Loan Estimate must meet accuracy tolerances that limit variances between estimated and actual costs. However, loan originators may face circumstances, such as those described in the scenario, in which too little information is available to offer an estimate that can meet these standards for accuracy. The regulations do not prohibit the use of an unofficial estimate if the originator makes it clear that a potential loan applicant should not rely on it as an accurate reflection of available loan terms and settlement costs.

The TRID Rule establishes the following specific requirements for an unofficial estimate:

· It must include a clear and conspicuous written statement on the first page in at least 12-point font that states, “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”

· The headings, format, and content of an unofficial disclosure cannot resemble those found on an official Loan Estimate

(12 C.F.R. §1026.19(e)(2)(ii))

The facts in the scenario do not indicate whether the unofficial estimate that I provided satisfied each of these requirements. She cautioned client that the disclosure was an unofficial one, but simply telling a consumer that an estimate is unofficial is not sufficient to show compliance with the TRID Rule. The regulations clearly establish that warnings related to the limitations of an unofficial estimate must be in writing.

The circumstances described illustrate how a creditor’s obligation to provide a Loan Estimate is triggered. I complied with the TRID Rule by sending client an official Loan Estimate within three business days of her receipt of the six pieces of information that constitute an “application,” as that term is defined in Regulation Z. Despite the fact that client’s URLA was incomplete, I received an “application” from him when he indicated the amount that he needed to borrow and submitted his name, income, Social Security number, the address of the property he wanted to purchase, and its estimated value (12 C.F.R. §1026.19(e)(1)(iii)).

Today, it is common to offer disclosures via email, and this practice is legal as long as a consumer provides prior consent electronically. However, in order to demonstrate the additional timing considerations that come with placing disclosures in the mail, the scenario describes use of the USPS in the early stages of client’s transaction. As the scenario unfolds, “facts” related to the close timing for client’s closing date will show the requirements related to the electronic delivery of disclosures.

Determining whether a Loan Estimate is made in good faith involves comparing the costs disclosed on the Loan Estimate and on the Closing Disclosure and calculating differences between the estimated and actual charges (Official Interpretations, 1026.19(e)(3)(iv)(1.)). Loan costs can vary with market changes, and the regulations protect creditors from hesitation and delay on the part of consumers by creating a ten-business-day expiration for Loan Estimates (12 C.F.R. §1026.19(e)(3)(iv)(E)). A creditor may offer to extend the expiration date since there are no regulations that preclude the negotiation of this point between loan applicants and creditors.

If a creditor and a consumer do not agree on a longer expiration period and a consumer indicates an intent to proceed with a transaction more than ten business days after a creditor provides an official Loan Estimate, the creditor:

· May issue a revised disclosure

· Is not required to document reasons for higher costs than those listed on the original Loan Estimate, and

· Should include a document in the loan file stating that it issued a revised disclosure at the end of the ten-business-day expiration period

· When providing a revised disclosure in response to a consumer’s delayed notice of his/her intent to proceed, the original Loan Estimate is not relevant when determining whether the creditor offered a good faith estimate of closing costs. Instead, the revised estimate and the Closing Disclosure are compared.

· When calculating the ten-business-day expiration period, business days include those days that a creditor’s offices are open to the public to perform substantially all business functions (12 C.F.R. §1026.2(a)(6)).

· On the afternoon of Thursday, August 10, I had legitimate reasons for putting aside her other responsibilities to prepare an SSP list for client. The requirement to provide a written list of service providers is subject to the same three-business-day deadline that applies to the Loan Estimate, meaning Sofia needed to send out the list on August 10 in order to remain in compliance.

When a consumer is allowed to shop for settlement services, the following tolerances apply:

· 10% tolerance: the permissible variance between estimated and actual charges is 10% when a creditor allows a consumer to shop for settlement services and the consumer selects a settlement service provider from the SSP list

· Unlimited tolerance: if a creditor allows a consumer to shop for settlement services and the consumer chooses a provider that is not on the SSP list, no limits apply to the variance between estimated and actual charges

When a creditor does not allow a consumer to shop for settlement services, the tolerance for variances between estimated and actual costs is zero. Therefore, if I failed to provide the SSP list in a timely manner, no variances would be allowed between the estimated and actual costs for settlement services (Official Interpretations, 1026.19(e)(3)(iii)(3.)).

Sofia’s separate delivery of the Loan Estimate and SSP list was not a violation of the TRID Rule. In fact, the rule actually requires creditors to provide the SSP list separately from the Loan Estimate, and prohibits creditors from including information about service providers on the Loan Estimate (12 C.F.R. §1026.19(e)(1)(vi)(C)).

Sofia satisfied another regulatory requirement when she mailed an Affiliated Business Arrangement Disclosure with the SSP list. Creditors are allowed to include affiliates on the list of recommended service providers, but including an affiliated provider’s name on the list constitutes a referral that is subject to the disclosure requirements of RESPA (Official Interpretations, 1026.19(e)(1)(vi)(7.)).

The Appendix to Regulation Z includes a number of model forms that are intended to facilitate compliance with the TRID Rule, and these include form H-27 for the SSP list. Although use of most model disclosure forms is required, use of form H-27 is optional. Creditors, such as the fictitious LL Mortgage Company, may create their own form as long as the substance and clarity of the disclosure is not affected.

Additional requirements related to the SSP list include:

· Providing recommendations for providers who are actually in business and able to provide services in the area where the consumer or his/her property is located

· Disclosing sufficient contact information to allow the consumer to reach recommended service providers

· Limiting qualification requirements for service providers that consumers find on their own to those that are “reasonable,” such as requirements for licensing in the jurisdiction where the services will be performed

(12 C.F.R. §1026.19(e)(1)(vi)(C); Official Interpretations, 1026.19(e

Until a consumer confirms that he/she wishes to proceed with a transaction, the TRID Rule prohibits the collection of any fee other than a fee for obtaining a credit report (12 C.F.R. §1026.19(e)(2)(i)(A)). Sofia complied with the TRID Rule by waiting to ask for an application fee until Allen stated his intent to move forward. Collecting a $35 fee to run a credit check during her second meeting with Allen was not in violation of the law since the fee was bona fide and reasonable. The regulations do not include particular requirements for establishing a consumer’s intent to proceed with a transaction. In fact, this confirmation may be oral as long as the creditor documents it. Sofia acted in compliance with the TRID Rule by confirming Allen’s intent and documenting it with the placement of a note in his loan file.

The TRID Rule encourages creditors to provide reliable Loan Estimates by limiting the circumstances in which they can revise an initial estimate and offer a revised Loan Estimate. There is only one circumstance in which a revised estimate is required, and that is when a rate-lock occurs after an initial Loan Estimate is delivered to a consumer. For example, if a loan applicant pays for a rate-lock after receiving an initial Loan Estimate, the creditor must provide a revised disclosure that lists the new interest rate and any other rate-dependent charges and terms. The revised Loan Estimate is due within three business days of the date that the interest rate is locked (12 C.F.R. §1026.19(e)(3)(iv)(D)).

In the following circumstances, revised Loan Estimates are permitted, but not required:

· Changed circumstances that affect settlement charges:if changed circumstances cause the amounts stated on the Loan Estimate to increase, or cause the aggregate amount of estimated charges and recording fees that are subject to the 10% tolerance to increase by more than 10%, the creditor may issue a revised Loan Estimate. This may include:

o Extraordinary or unexpected events: these may include war or a natural disaster. They may also include other unexpected events that are less catastrophic. In its official commentary, the CFPB gives the example of a creditor that prepared a Loan Estimate using costs for title services from a title company that goes out of business during the underwriting stage of a transaction. In this circumstance, a revised Loan Estimate is permitted.

o Inaccurate information: a changed circumstance may include a determination that information relied on by the creditor is inaccurate. The CFPB cites the example of a consumer who states earnings of $90,000 on a loan application when his salary is actually $80,000. When underwriting discovers this inaccuracy in information that the creditor relied on when providing the Loan Estimate, a changed circumstance has occurred and a revised Loan Estimate is permitted.

o New information: even if not relied on by the creditor, new information may justify a revised Loan Estimate. The rules do not define the meaning of “new information,” but in its official commentary, the CFPB uses the example of a boundary dispute with a neighbor that arises when a home seller puts his/her house on the market.

· Changed circumstance affecting eligibility: changed circumstances affecting eligibility may include events that impact a consumer’s eligibility for a mortgage, such as loss of employment. They may also include circumstances related to the suitability of a home as security for a loan. For example, if damage to a home occurs during the underwriting process, a changed circumstance has occurred.

· Revisions requested by the consumer: a changed circumstance occurs if a loan applicant asks for changes to the loan terms or settlement, and these requested changes result in an increase in an estimated charge.

· Expiration of offer: as noted earlier, a Loan Estimate expires if a consumer waits more than ten business days to state an intent to proceed, and a revised disclosure may be provided.

· Delays related to construction loans: if the creditor reasonably expects settlement to occur more than 60 days after providing the applicant with a Loan Estimate, a revised disclosure can be provided, so long as the original Loan Estimate clearly and conspicuously states that the creditor may issue revised disclosures at any time prior to 60 days before consummation.

(12 C.F.R. §1026.19(e)(3)(iv))