A Trail of TRID Tribulations


Ramifications from this year’s new mortgage disclosure rules continue to play out

By Howard Schneider

Looking back on 2015, many community bankers will likely remember it as the year of the TILA-RESPA Integrated Disclosure (TRID) rules. Their memories are likely to be more stressful than sweet.

“They’ve been training people for months,” explains Ron Haynie, ICBA’s senior vice president for mortgage finance policy, referring to community banks’ compliance preparations for the Know Before You Owe mortgage disclosures. Nevertheless, the tribulations from the two-year buildup and hassles to implement the new TRID rules this year likely aren’t over yet—for community bankers and for their home-buying customers.

Significantly, homebuyers are also facing longer and more expensive mortgages as a result of the complex disclosure changes. As the October compliance deadline passed, some mortgage software vendors were still scrambling to make all of their TRID system changes and communicate them to their community bank clients. Also as of November, the Consumer Financial Protection Bureau, which lagged earlier in releasing other final guidance to banks and their software vendors, also hadn’t given all of the guidance community banks needed to provide notifications for certain mortgage loans, such as single-close construction-permanent financing, that are a staple of community bank mortgage lending.

But Haynie also points to unquantifiable repercussions taking their toll from yet another complex and costly regulatory requirement handed down since the avalanche of changes prompted by the Wall Street financial crisis. Some borrowers are likely misled to believe all lenders are out to take advantage of them, he says. And amid the current absence of regulatory clarity and certainty, he says, “you hope and pray you don’t get sued” for practices that later could be deemed to be infractions, however technical or minor.

“CFPB has created an adversarial environment,” Haynie says. “People want to do the right thing.”

Implementing the rule

Community banks spent countless hours this year preparing and training their staffs for the disclosure-rule changes, but the process of so-called mortgage disclosure simplification began long before. Five years ago Congress directed the CFPB to combine the federally required residential mortgage disclosures. Both the Truth in Lending Act and the Real Estate Settlement Procedures Act had stipulated separate mortgage borrower disclosures since the early 1970s. On statutory orders from Congress, the CFPB issued a final rule in November 2013 for mortgage originators to adopt the various new mortgage disclosures for most home loan applications.

“People want to do the right thing.”
—Ron Haynie, ICBA’s senior vice president housing finance policy

But essential details and guidance weren’t sufficiently available weeks before the original August compliance deadline, which hindered bank mortgage software vendors and community banks, for all practical purposes, from beginning their hands-on compliance preparations weeks before the original August 2015 compliance deadline for the TRID rule. And then, ironically, the CFPB acknowledged it had made a minor error by not providing notice to Congress within 60 days of the implementation of a rule, as required by the Administrative Procedures Act, and therefore would need to delay the implementation.

At the urging of ICBA and other industry groups, the CFPB postponed TRID’s implementation by two months. Also acknowledging the broad scope and scale of TRID compliance, the other regulators said their examiners are expected to consider institutions’ good-faith efforts to implement the rules, although ICBA had recommended more definitive measures for providing community banks reasonable compliance leeway.

ICBA also continues advocating legislation in Congress to implement a reasonable hold-harmless period for good-faith efforts to comply with the TRID rule.

Before TRID, the Good Faith Estimate process allowed some flexibility between a lender’s original estimates of certain costs and the final costs of those items. Borrowers were happier at closing if their transaction costs had dropped a little from the original estimates. Now under TRID, mortgage lenders must more precisely quote fees on the new Loan Estimate initial disclosure form. The rule mandates “zero tolerance” for changes on real estate transfer taxes, as well as on fees paid to the lender, loan originator and settlement agent, if borrowers elect not to shop for settlement services.

A 10 percent total increase in fees is allowed on recording fees and closing costs, which borrowers shop for on their own. Lenders are required to give borrowers a list of alternative providers if they choose to shop for title services, a survey or pest inspection. Loan Estimates must be given to consumers within three days after a loan application is submitted. Revised Loan Estimates must be submitted to applicants if new circumstances cause the charges to rise above tolerance levels.

Anything from new information about the borrower’s finances to applicants’ waiting more than 10 business days before indicating their intention to proceed can trigger a revised Loan Estimate. Consumers must receive the new Closing Disclosure—which replaces the current HUD-1 and HUD 1A settlement statements—at least three business days before the final loan papers are signed. A revised Closing Disclosure is required if the Annual Percentage Rate increases more than one-eighth of a percent, the loan product changes or a prepayment penalty is added. Changes prompted by these variable factors out of the control of lenders will restart a mandatory three-business-day waiting period again for borrowers.

Unfortunately, these TRID dynamics are increasing costs for lenders, which will translate into higher rates for borrowers. Besides the expense of upgrading software and training staff, mortgages are likely to take longer to close under the new disclosure rules. The rule’s required waiting periods for delivery and receipt of the Loan Estimate and Closing Disclosure, along with the amount of time required to process and underwrite a mortgage loan, will make it nearly impossible for community banks to close a mortgage within 30 days of taking an application. Because of the TRID rule, more banks will need to use the 45-day or 60-day rate commitments that will cause more homebuyers to pay higher interest rates for the same loan than before.

Lack of guidance

Even with a two-year period to prepare at least in theory for TRID, basic compliance questions linger for some lenders. How to disclose title insurance premiums in certain situations, how to conduct single-close construction-permanent financing and how to do co-op lending are specific areas where the CFPB hasn’t provided full guidance, Haynie notes.

Haynie and community bankers point out that TRID involves much more than adopting two new disclosure forms. The disclosure changes have required most community bank mortgage lenders to alter the processes in how they originate home loans. In addition to adjusting to the revisions made by their loan software providers, this past year such changes have included changing processes for working with borrowers, settlement providers and real estate agents.

To implement TRID, Haynie says, some community banks have for months devoted a day or two per week to instructing their mortgage staffs on how to work within TRID guidelines. Yet some technology providers didn’t have updated versions ready for lenders to test until shortly before TRID went into effect. As a result, notes Haynie, at times software hasn’t worked well with other systems, making manual intervention necessary to provide disclosures.

A lot of collaboration between lenders, title firms and real estate agents goes into producing initial cost estimates and closing documents, notes Haynie. Yet legal liability for the accuracy of disclosures rests completely on lenders under TRID. Deciding whether a community bank or the closing or title agent will prepare closing disclosure and which parties have the authority to make changes to the Closing Disclosure after they’re issued are concerns for community banks.

The new TRID rule appears designed to regulate high-volume, transaction-based lenders, yet it still applies to all home loan originators. Nevertheless, Haynie believes community banks will be at a comparative advantage as TRID is implemented, because local lenders “can respond to issues and make a decision quickly” when necessary. He also acknowledges that the Lending Estimate “is easier for consumers to read and understand” than the old Good
Faith Estimate.

Although ICBA continues to push for written guidance on various issues over the TRID rules, that won’t resolve other basic and fundamental concerns about the overall approach to implementing major regulatory changes, Haynie says. ICBA also continues to monitor TRID-related penalties and to report enforcement actions to Congress. The CFPB is expected to keep focusing on automating lending processes. A report on the bureau’s eClosing project was recently released “to promote best practices” for lenders. “Electronic mortgage closings can benefit consumers,” CFPB concludes.

More broadly, however, all of the rule’s outcomes and stresses during the past year reflect how the process of implementing major new regulations could be and should be improved and possibly reformed, Haynie says. Community banks and their customers have undergone a series of major regulatory changes recently, resulting in less flexibility for community bankers to meet the needs of their customers.

Howard Schneider is a freelance financial writer in California.