Final Countdown: Mortgage Industry Apprehensive as TRID Effective Date Looms

CFPB  •  Mortgage  •  Regulation  •  Regulation Primers  •  RESPA  •  TILA

Loan Application

Arguably the most pressing topic at this year’s Mortgage Bankers Association’s (MBA) Regulatory Compliance Conference (held on September 20-22, 2015 in Washington, D.C.) was the implementation of the TILA-RESPA Integrated Disclosure (TRID) Rule, which will take effect on October 3, 2015.   While industry leaders at the conference generally seemed to accept that the new rules are a reality and that at least some of the changes may indeed improve the disclosure process, the numerous conference panels and discussions focusing on TRID were marked by a sense of trepidation as the implementation date draws near.

Readers who are involved with compliance issues at mortgage lending institutions are likely quite familiar with TRID, the complex and far-reaching new system for disclosures under TILA and RESPA that many are describing as a “sea change” in the way the mortgage industry does business.  As we discussed in an earlier post, TRID involves a number of changes to the disclosure requirements, including the use of the new Loan Estimate upon application (in place of the previously-used Good Faith Estimate and early Truth in Lending form) and the new Closing Disclosure at consummation (in place of the final Truth in Lending form and the HUD-1); tightened tolerances for subsequent changes in estimated fees; and the establishment of a 3-day waiting period between the Closing Disclosure and consummation of the loan.

While many in the industry agree that at least some of the changes will be positive in the long run, several issues seem to be of continuing concern to lenders trying to get ready for TRID:

It’s complicated.  The Final Rule is long and complex and contains so many new provisions that it can be difficult to understand.  Even simply determining whether to use the new TRID processes for a particular loan requires several analyses:

  • Pre- or post-October 3rd?  TRID goes into effect on October 3rd, but only as to loan applications received on or after that date; for loan applications received before October 3rd, lenders must use the old forms and disclosure processes even if they do not begin processing those applications until after TRID takes effect.
  • Has an application been submitted?  TRID broadens the definition of “application”; under the new rules, an application exists as soon as the consumer submits their (1) name; (2) income; (3) Social Security number; (4) property address; (5) estimated value of property; and (6) mortgage loan amount sought.  The change means an “application” is complete with the submission of less information than lenders may currently require.  And whether this information has been “submitted” also requires a careful factual inquiry: current thinking is that the “submission” of an application could be as informal as a customer confirming the six required elements to the lender over the phone.  Determining when an “application” has been “submitted” under TRID’s revised definition is critical because once an application has been submitted, the lender must provide the borrower a Loan Estimate within three days.
  • Is the loan covered by TRID?  While TRID generally applies to all closed-end consumer transactions secured by real property, the boundaries of the Rule’s application are blurry.  For example, whether a loan to purchase a co-op is covered by TRID depends on the law of the applicable state since co-ops are considered real property for tax purposes in some states and personal property in others.  Note that the type of property sought to be purchased is not one of the pieces of information required before the “application” is complete under the new TRID definition, so lenders will need to take care to obtain that information as quickly as possible to determine the applicability of TRID to the loan.

This process of determining whether a loan is subject to TRID is not insignificant: the Rule requires lenders to use the TRID process for covered loans and the old TILA and RESPA processes for non-covered loans, so lenders cannot try to take a conservative approach and simply use the TRID procedures for all loans.

It’s still unclear how certain provisions work.  Perhaps the biggest topic of discussion at the MBA conference was if, and how, lenders can re-baseline loan terms after they have provided the Closing Disclosure to the borrower.  This issue has been referred to as the “black hole” or “gap”: a lender can only reset fee tolerances based on changed circumstances by providing the borrower a new Loan Estimate within three days of the triggering event.  The lender can provide multiple revised Loan Estimates to reflect changes during the course of the processing period, but once the lender provides the borrower the Closing Disclosure, it cannot further revise the fees.  The exception to this is that if the triggering event occurs within seven business days of consummation, the creditor can reflect those changes on the Closing Disclosure at consummation.  But what happens if there’s a major change after the Closing Disclosure is provided but before seven-day exception window kicks in?  For reasons beyond the lender’s control (i.e., a borrower-requested delay or natural disaster) the lender may have no legal way to provide the revised Closing Disclosure within three days of the triggering event and within the exception window it needs to be in to make the change.  In this situation, the lender will be stuck with whatever the tolerances were in the initial Closing Disclosure because the triggering event happened too far in advance of consummation.  The result will be that, to follow through on the loan, the lender must absorb the losses associated with the changed circumstance.  It is unlikely that the CFPB intended this result, but at present it has not clarified how lenders can resolve this “black hole.”  Current thought among industry leaders is that the CFPB will wait until TRID takes effect before providing clarification or tweaking the relevant provisions.

There’s no “soft landing.”  Amplifying the above concerns is the fact that there will be no safe harbor once TRID goes into effect.  Lenders will not have an opportunity to test their systems or procedures in a real-life setting before enforcement takes effect on October 3rd, and this has lenders worried since the Rule requires such a major revision of existing processes.  The CFPB has indicated that it will “be sensitive to the progress made” by entities that make “good-faith efforts to come into compliance with the Rule on time,” but it is unclear what exactly this means, and technically the agency can begin enforcing the Rule on October 3rd.  Particularly in light of what some see as a trend of increasing “rulemaking by enforcement” by the CFPB, lenders are apprehensive about what will happen if they have trouble complying fully with the new rules right away.

For these and other reasons the industry is, understandably, nervous about the implementation of TRID.  The CFPB has repeatedly reassured the industry that it will work with them to help them come into compliance with the new rules, and it is possible that once TRID takes effect and it becomes clear which parts of the new process need adjustment, some slight changes or clarifications will be provided.  In the meantime, there are a number of resources available from sources like the CFPB and the MBA to help lenders prepare for TRID.  Lenders can refer to these resources to make sure that they – and the vendors and third parties they work with – are as familiar with TRID as possible in order to make the transition a smooth one.

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