July 06, 2015
TRID and the Law of Unintended Consequences
With the CFPB’s latest delay of the TRID implementation date (this time to October 3rd), real estate practitioners have two extra months to plan and two extra months to worry about what the new world of transactional real estate will look like under the new rule. Of course, no one is actually complaining about the delay.
Under the new rule, known as the “Know Before You Owe,”[i] consumers must be given the Loan Estimate (LE) with all the charges, fees and line items three days before closing, rather than at the closing as with the HUD-1. While this three-day period is by design—CFPB believes that consumers are better protected from surprise changes at the closing table if given ample time to review the documents—it could also slow the momentum of the transaction by delaying some closings six or seven business days to allow for the required disclosures and waiting time.
Enter: The Law of Unintended Consequences
A short waiting period to make sure borrowers know what they are getting into—what could possibly go wrong? Well…
- The waiting period could hurt homebuyers using a mortgage and bidding against all-cash buyers, since the potential delay could further disadvantage their bid.[ii]
- The additional time period could put a strain on the rate lock agreement by eating into the rate lock period.
- The additional time to closing could compound the existing three business-day right of rescission post-closing. Now funding will take longer from the contract date and—for loan officers looking to fund before month-end—require closings to be scheduled even further before the end of the month.
- TRID may reduce flexibility in transactions. For example, certain transaction changes can trigger a new three-day waiting period (six days if the notice is sent via U.S. Mail[iii]), creating a disincentive to change certain terms. Even minor changes that do not trigger a new Closing Disclosure (and waiting period) will need to be reviewed and approved by the lender given the lender’s responsibility for deviations from the CD. Some attorneys are reacting to this by adding a fifteen-day buffer period before the estimated closing date.[iv]
- The TRID designation of an owner’s title insurance policy as “optional” creates potential issues for the attorney. The challenge comes when the client decides not to purchase this protection. This sets up a situation in which clients who decline an owners’ policy and face title issues post-closing may sue their attorneys.Many attorneys are asking clients who opt out of an owner’s policy to sign a written waiver releasing the attorney from liability. Some attorneys, however, do not think there is any waiver language sufficient to protect themselves, especially on a particularly expensive piece of real estate where a loss could exceed the limits on the attorney’s professional liability insurance coverage.Also, asking a client to sign any kind of release of liability raises an inherent conflict of interest: the release is a document meant for the attorney’s protection, authored and acknowledged by the attorney, and drafted for the attorney’s benefit. Some attorneys may only agree to represent the buyer if the seller executes a warranty deed and the seller proves he is not judgment proof—something that is highly unlikely in New York. An attorney may even choose to charge the client more for the transaction, given the additional risk the attorney is assuming and for the additional time and effort the attorney has to expend to temper the risk.
CFPB sees only limited risk of transaction delays
The CFPB sees things differently. According to CFPB Director Richard Cordray, “The three-day requirement should not interfere with a successful closing, as some have claimed…The timing of the closing date is not going to change based on any problems you discover with the home on the final walk-through, even matters that may change some of the sales terms or require seller’s credits.”[v]
Still, the CFPB admits that a transaction could be delayed if:
- The APR increases by more than one-eighth of a percentage point for fixed-rate loans or more than one-fourth of a percentage point for variable-rate loans;
- The lender adds a prepayment penalty; or
- The basic loan product changes, such as moving from a fixed-rate loan to a variable-rate loan.
These circumstances are certainly conceivable but it’s unclear whether any of these situations would add additional delays, since all are fairly substantive changes that would likely bog down a closing even under the current regulations. For example, while some lending professionals complain that an issue discovered on the walk through could have a domino effect—changing the property value or other characteristics that ultimately result in a change to the APR—the issue discovered would likely have to be so large that it would generally result in a delay even without TRID.[vi]
Typically matters involving the buyer and seller, not the lender, trigger the need for last-minute loan changes. Under TRID, however, the lender bears the brunt of the changes. While the TRID rule allows the lender to increase fees based on certain changed circumstances, only the Loan Estimate may be used to increase fees. Since the rule does not permit a lender to issue a Loan Estimate after the lender has issued a Closing Disclosure, there could be a perverse situation in which the lender who feels the need to increase fees instead has only two unpalatable options: a) bear the increased costs itself or b) deny the loan.[vii] If the lender took the second option, it would almost certainly be to the borrower’s detriment.
It is also possible that some closing delays will ease as TRID implementation progresses and lenders—who initially took a conservative approach—adjust to greater clarity in enforcement and interpretation.[viii]
[i] http://www.consumerfinance.gov/knowbeforeyouowe/ [ii] http://www.marketwatch.com/story/why-closing-on-a-home-could-soon-take-longer-2015-06-12 [iii] http://www.mortgagecompliancemagazine.com/featured/the-top-5-things-to-know-about-trid-now/ [iv] http://www.inman.com/2015/05/26/3-reasons-why-the-cfpb-should-delay-trid-enforcement/ [v] http://www.cfpbmonitor.com/2015/05/13/does-director-cordray-fully-appreciate-the-implications-of-the-trid-rule/ [vi] http://www.cfpbmonitor.com/2015/05/13/does-director-cordray-fully-appreciate-the-implications-of-the-trid-rule/ [vii] http://www.cfpbmonitor.com/2015/05/13/does-director-cordray-fully-appreciate-the-implications-of-the-trid-rule/ [viii] http://www.cfpbmonitor.com/2015/05/13/does-director-cordray-fully-appreciate-the-implications-of-the-trid-rule/ (Some voices in the lending industry point specifically to the uncertainty created by the complexity of the APR tolerances. Director Cordrary indicated that the 1/8 of 1 percent tolerance for regular transactions applies to fixed rate loans, and that the ¼ of 1 percent tolerance for irregular transactions applies to variable rate loans. Because there often is confusion as to what is a “regular” versus an “irregular” transaction, and because the availability of the APR overstatement tolerance depends on the relationship of the disclosed APR to the disclosed finance charge, it is common in the industry to use only an APR tolerance of 1/8 of 1 percent above or below the actual APR to assess if a new Truth in Lending Disclosure with a new waiting period must be provided. So, “many industry members will likely rely on the regular transaction tolerance of 1/8 of 1 percent to assess if a new Closing Disclosure with a new waiting period is required.” Some lenders posit that this will result in more delayed closings than would be the case if the TRID rule were revised to simplify when a new waiting period is required because of changes to the APR.)