Update on changes to settlement process

The Consumer Financial Protection Bureau has been working to modify much of how a real estate transaction is completed at settlement. The bureau refers to this project as TRID, which stands for TILA-RESPA Integrated Disclosure. TILA is the Truth in Lending Act that was passed in 1968, and RESPA is the Real Estate Settlement Procedures Act that was passed in 1974. In response to the real estate bubble, and the lending abuses that were part of that, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the consumer bureau and tasked that new agency with combining TILA and RESPA to improve consumer disclosures associated with a real estate lending and settlements. That generated TRID. The bureau has completed much of its work, and we have a better idea of what TRID will look like. First and foremost, TRID will change what the settlement statements look like. The settlement statement, which is commonly called the HUD-1, used to be only two pages long. Then, the government decided to simplify it and make it clearer. The result was an increase to four pages and a document that in many ways was less clear than the one that preceded it. With TRID, the settlement statement will now become 8 or 9 pages. Another major change is that there will be separate documents for both the buyer and the seller. In the past, the HUD-1 contained all the information necessary for both sides of the transaction. An improvement Although doubling the pages makes it sound like the settlement statement will become more complicated, the new forms are actually quite user-friendly. The primary goal in all of this is to help consumers clearly understand how their home loan works and better track the estimates they were given regarding loan costs against the actual numbers they get at settlement. Some tweaking might be required, but we think the new statements are fairly clear, easy to read, and for the most part, they seem to accomplish the stated goals of TRID. An additional objective for TRID was to provide borrowers with the disclosure of loan information prior to settlement. The bureau wanted to reduce the instances where buyers would get to settlement and find that their loan costs were higher than anticipated, but since all their possession were on a moving truck in the parking lot, they didn't have much choice other than to pay up and go to settlement. Under TRID, borrowers must be given the loan disclosure forms three days prior to closing. And, if certain changes are made to the numbers found in the settlement statement, that three-day review period must start over, possibly delaying settlement. At first, there was a lot of concern about this three-day period, because a lot of changes are often made at the last minute, changes that frequently impact the settlement statement. We now have more guidance. According to the bureau website, only three changes will require a new thee-day review period. They include: - The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans. A decrease in APR will not require a new three-day review if it is based on changes to interest rate or other fees. - A prepayment penalty is added, making it expensive to refinance or sell. - The basic loan product changes, such as a switch from fixed-rate to adjustable interest rate or to a loan with interest-only payments. The bureau website says that no other changes will require a new three-day review period. As an added point of explanation, they note, "There has been much misinformation and mistaken commentary around this point. Any other changes in the days leading up to closing do not require a new 3-day review, although the lender will still have to provide and updated disclosures. "For example, the following circumstances do not require a new 3-day review: 1) Unexpected discoveries on a walk-through such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer. 2) Most changes to payments made at closing, including the amount of the real estate commission, taxes and utilities proration, and the amount paid into escrow. 3) Typos found at the closing table." These clarifications were critical in alleviating many of the fears real estate agents and others in the industry had about TRID. The bureau requirements with TRID are actually quite reasonable. Not an escape hatch Importantly, though, consumers should realize that this three-day period is not there as a means for withdrawing from the contract. It is just there to give borrowers time to absorb the information they will be seeing at settlement and give them an opportunity to get more of an explanation about their loan from their lender. The three-day period is NOT a chance for buyers to change their mind about buying the house. Also, real estate agents should be aware that just because the loan disclosure information must be made available three days prior to closing, that does not mean the money or the loan package will be ready three days before closing. Unfortunately, those important pieces will show up at the last minute like they always have. Consumers might not realize it, but the money that funds the loan, pays all the settlement expenses and the documents that guide the whole process, are a just-in-time sort of thing. Agents and settlement officers are often pacing the floor, minutes before settlement, waiting for an email notification that the money and loan package have arrived. In total, it looks like TRID will actually be a positive for the process. But like any change, it's going to create some turmoil for a bit of time. As a result, if you're looking to settle on a house sometime this fall, give yourself plenty of time and make sure that your real estate agent, lender and title company are fully up to speed on TRID. If they aren't you'd be well-served to find someone else to do the deal. Published: Mon, Aug 03, 2015