TILA-RESPA: How Will You Be Affected?
Buying a house is a complex transaction. Sellers and buyers must access the services of real estate agents, mortgage lenders, title companies, appraisers and other professionals, to ensure the property title transfers, the loan is secured and the seller gets paid.
The housing industry collapse of 2008 revealed significant problems in the processes involved in buying a house. Home buyers received confusing or misleading documentation, leading to foreclosures and losses. In response, the federal government reviewed those processes against the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), and issued a revision of real property sales rules to streamline and simplify the process. Known as the “TILA-RESPA Integrated Disclosure Rule” (TRID), the purpose of the revision is to reduce the opportunity for fraud or gouging by unscrupulous money lenders. It redefines the activities of all the real estate professionals involved in every property transaction and comes into effect on October 3, 2015.
For real estate agents, the changes are significant.
New Disclosure Forms are Required
The “Good Faith Estimate” and the TILA disclosure forms will become obsolete, replaced by a single form that incorporates the details of both. The new form is known as the “Loan Estimate” (LE) form and will explain at the start of the mortgage lending process the loan’s key features, costs and risks.
The Closing Disclosure (CD) form combines the final TILA statement with the HUD-1 settlement statement, providing a detailed account of the loan terms, fees and closing costs, and all other aspects of the transaction.
The only authorized pre-contract fee that a lender can charge is for a consumer’s credit report.
Mortgage lenders will have three days from receipt of a complete loan application to provide the LE for prospective borrowers. (A “complete loan application” consists of the potential buyers name, address, income, Social Security number, property value estimate and the requested amount of the mortgage loan.) Changes that occur during the process of securing the loan and that change the terms of the contract (such as a change in the proposed annual percentage rate, the basic loan product changes, or the addition of prepayment penalties, as examples) will reset the three-day clock. Lenders will then have three days to reissue a new LE that incorporates the changes.
Potential buyers are required to notify the lender of their “intent to proceed” with the transaction. Lenders often have different internal tools for use for this purpose. If they have not been given notice of the intent to proceed within ten days of issuing their offer, the terms within that offer can expire.
The CD must be received by the buyer at least three days before the scheduled closing. Home buyers can compare this document to the original LE to ensure their satisfaction with the deal.
Also, the CD must include the buyer’s and seller’s brokerage’s and agent’s names, physical and email addresses, license numbers, and phone numbers.
Crossover Period May Be Confusing – Plan for Delays!
Loans open before October 3rd are not affected so there will be a period of time when old and new processes are occurring simultaneously. After the switch, lenders may be slower to process their internal details while they ensure they are in compliance with the new rules. This cautiousness may slow down the entire process and could impact both buyers and sellers who need to accurately schedule moving days, work absences and other details. Early and comprehensive communications between all transaction parties will reduce the opportunity for unnecessary delays.
All Professionals Will Be Involved in Informing Consumers
Previously, educating home buyers about the details of the transaction has been left primarily to the agents and brokers. The new rules establish stronger communication lines between the buyers and the mortgage lenders, title companies and closing settlement services. Each of those entities now has an elevated obligation to keep the buyer (and everyone else) informed of all relevant details in their portion of the transaction.
For settlement services providers, TRID provides an opportunity for a regional or national evolution towards standardized best practices. Different states have their own processes for closing real estate sales, and sometimes even within states, those processes differ. As each professional develops their individual “best practices” according to the TRID, overall, the entire industry should evolve processes that are more aligned with other areas.
Change is Good.
Some commentators believe that the enhanced regulations around real estate transactions will elevate the professionalism of all involved, and encourage the development of additional business growth opportunities. The real winners, however, will be the satisfied buyers and sellers, who will experience a much easier and transparent home sale transaction.