KNOW BEFORE YOU OWE A NEW ERA IN MORTGAGE LENDING

By Francesca Passeri, Esq.

MORTGAGE LENDING Starting on October 1, 2015, a new set of rules for lenders and closing agents will go into effect as a result of the Dodd Frank Act.  The Consumer Financial Protection Bureau (CFPB) will enforce a mortgage lending regulation called the TILA-RESPA Integrated Disclosure (TRID) or the Know Before You Owe law. The regulation is intended to provide borrowers/consumers with an upfront, accurate projection of their cost to obtain a closed-end consumer mortgage. The basis of the mortgage lending reform is to better educate the consumer about loan terms and costs earlier in the loan process. The policy makers believe that a well-informed consumer acting in their self-interest will avoid entering into a financial arrangement which
presents a greater risk to their ability to repay the debt.

TRID will be the most significant departure from the manner in which financed real property transactions have been handled since the HUD-1 Settlement Statement became a mandatory loan form in 1974. The existing Good Faith Estimate (GFE), HUD-1 and Truth in Lending (TIL) forms will no longer be used for most mortgage loans. Closing agents and lenders (called “creditors” under TRID) will be required to share information relative to the real estate transaction and to work collaboratively to communicate this information to the mortgage consumer early in the loan process. CFPB will have the authority to impose significant fines on creditors ranging from $5,000.00 to $1,000,000.00 per day for failure to comply with TRID requirements. TRID does not apply to Home Equity Lines of Credit, reverse mortgages secured by a mobile home or by a dwelling unit that is not attached to land. Seller financing of property is not covered under TRID provided that the person extending credit makes five or less fully amortized mortgage loans in a calendar year.

The creditor must deliver or place a Loan Estimate in the mail to the consumer no later than the third business day after receiving the consumer’s loan application but no sooner than the seventh business day prior to consummation of the loan. Consummation is when the consumer/borrower becomes contractually obligated to the creditor on the loan, or simply put, when the consumer signs the promissory note. The three page Loan Estimate includes basic information about the proposed financial transaction, to include: the name and address of the creditor, the loan amount, interest rate, loan term, monthly principal and interest payments, negative amortization, late payment fees, partial payment options, any pre-payment penalty, balloon payment, mortgage insurance, estimated escrow for property taxes  and insurance, estimated closing costs and estimated cash required to close. Costs may be itemized and each category of costs is subtotaled on the form. The Loan Estimate is further divided into categories of costs that the consumer can and cannot shop for outside of the creditor. If the loan is subject to an adjustable interest rate or interest-only payments, that information is included on the Loan Estimate. All costs related to title insurance must include the introductory description of “Title”. The third page of the Loan Estimate is devoted to additional information about the loan so that the borrower can compare it to other loans. This information will include how much interest, mortgage insurance and loan costs will have been paid by the borrower in the first several years  of the loan. The Annual Percentage Interest Rate (APR) and the Total Interest Paid (TIP) disclosures as well as whether the loan is assumable and whether the creditor intends to retain servicing of the loan are included within this portion of the Loan Estimate.  The consumer must sign the Loan Estimate to acknowledge receipt of the document and is advised to retain the Loan Estimate to compare it to the Closing Disclosure when it is provided by the creditor.

The creditor is bound to the accuracy of the Loan Estimate. Fees paid by the consumer to the creditor, mortgage broker, or an affiliate of either cannot change. Fees imposed by third parties for services where the borrower was not allowed to shop and transfer taxes are also subject the zero tolerance unless changed circumstances allow the creditor to issue a revised Loan Estimate to the consumer. Recording costs and charges paid to a third-party service provider on the written list provided by the lender are subject to a 10% cumulative tolerance. Examples of changed circumstances would be an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or the transaction. Changed circumstances would also include an interest rate lock that changes the loan figures, a new construction loan in which settlement is delayed more than sixty days, and when the consumer indicates an intention to proceed with the transaction more than ten days after the Loan Estimate was originally provided. Changed circumstances may also occur when there is a change in the consumer’s eligibility for a specific loan, such as a change in verified income or the loss of income or increased expenses for the consumer from the time the Loan Estimate was delivered. A Loan Estimate can also be revised when the consumer requests changes to the credit terms or settlement.

The Closing Disclosure is a five page form which replaces the existing HUD-1 settlement statement and Final Truth in Lending disclosure.   The Closing Disclosure contains much of the same information as the Loan Estimate in a different format. Consummation may, but need not occur, on the real estate settlement or “closing” date. A Closing Disclosure must be provided to the consumer at least three business days prior to Consummation. The Loan Estimate form replaces the existing GFE and TIL and provides a good faith estimate of credit costs and transaction terms. A Creditor can only issue a revised Loan Estimate when specific requirements are met, which does not include technical errors, miscalculations or under-estimating loan charges.

Timing will be critical in delivery of the Loan Estimate, Revised Loan Estimate, and Closing Disclosure so that delays in settlement do not occur. For purposes of providing the Loan Estimate to the consumer, a business day is a day on which the creditor’s offices are open to the public for business. For delivery of the Closing Disclosure and all other purposes, a business day means all calendar days except Sunday and legal public holidays. The creditor may not provide a revised Loan Estimate on or after the date on which it provides the Closing Disclosure. When a Revised Loan Estimate is allowed, it must be received by the consumer no later than four business days prior to Consummation. If the creditor is mailing the Revised Loan Estimate to the consumer, the consumer is considered to have received it three business days after it is mailed. If the disclosed APR becomes inaccurate, the loan product changes, or a prepayment penalty is added prior to Consummation, the creditor must provide the borrower with a corrected Closing Disclosure and a mandatory three business day waiting period prior to Consummation commences from the date of delivery. The creditor can provide the Closing Disclosure to the consumer in person, by mailing or by email. Settlement agents are permitted to provide the Closing Disclosure to the consumer on behalf of the creditor and are required to provide this form to the Seller in a purchase transaction. In certain circumstances in which the mortgage loan is needed to meet a bona fide personal financial emergency, the creditor may waive the seven day waiting period between delivery of the Closing Disclosure and Consummation.

TRID’s strict compliance deadlines will require increased communication and organization on the part of the real estate agents, lender, consumer and settlement agent. Last minute changes to the transaction which may have occurred up to the day of closing will no longer be allowed. There is an expectation that a financed transaction that formerly would have taken thirty to forty-five days to close, may take up to sixty days to close to allow the creditor adequate time to make all of the required disclosures and to observe the associated waiting periods. The standard form real estate contracts which are utilized locally and throughout the State of Florida are being revised to allow the purchaser an additional ten days to close if the TRID rule is the sole reason for the delay in the purchaser’s ability to close on the contract date. Back to back transactions where a party sells one property and immediately acquires a substituted property will be initially very difficult to coordinate. Because the creditor requires all of the costs of the transaction to be disclosed to the consumer very early in the closing process, the consumer may incur expenses for application fees, lien searches, surveys, and estoppels on a transaction which terminates during an inspection period. It is being recommended that real estate agents conduct walk-throughs of the property no less than ten days prior to the closing. If there are any repairs to be made to the property or personal property has been removed, the parties can make adjustments to the purchase price before the new disclosure requirement would cause a delay in the closing date. The initial implementation of the Know Before You Owe rule will result in some frustrations to the closing process which will hopefully be off-set by the consumer’s increased knowledge and confidence in their decision to obtain a mortgage loan.

This Article does not constitute legal advice and may not be relied upon as such.  Each individual’s facts and circumstances are different. If you have any questions regarding your particular situation, please consult with legal counsel.

Francesca Passeri, Esq.
Francesca Passeri practices in the areas of residential and commercial real estate transactions, zoning and land use matters and real estate related litigation. Ms. Passeri received a B.A. in Theater Arts from the University of Iowa (1988) and graduated with distinction from the University of  Iowa College of Law in 1995. Ms. Passeri worked as a sole practitioner in Tipton, Iowa until 2004.

She is a member of The Florida Bar (Real Property, Probate & Trust Law Section). She is also a member of the Collier County Bar Association, Collier County Women’s Bar Association, Iowa Bar Association, and Cedar County Bar Association. She has volunteered extensively for the Iowa Legal Services Volunteer Lawyer’s Project and Florida Attorneys Saving Homes. Ms. Passeri has been recognized by Legal Aid of Collier County for her efforts on behalf of the Collier County Foreclosure Task Force.

Salvatori, Wood, Buckel, Carmichael & Lottes
239.552.4100 | www.swbcl.com

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