Halloween-time of last year brought us our first taste of closing real estate transactions within the new Truth in Lending Act, Real Estate Settlement and Procedures Act, Integrated Disclosure regulatory system (TRID). So how have we fared during these first few months? As with any major paradigm shift and systemic revolution, we, as an industry, have had and will continue to experience significant growing pains. This was anticipated. But is the worst behind us? And most importantly, what about the consumers for whom TRID was intended to champion? Are they, in fact, better off?
The term TRID is an acronym for the new federal rules promulgated by the Consumer Financial Protection Bureau (CFPB), a rule making and enforcement body born of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. These rules govern all residential mortgage lending throughout the country. But they certainly have a much more significant impact here in New York, an “attorney state”, than in other “escrow” jurisdictions where extended settlement periods are commonplace.
TRID was designed solely with the benefit of the consumer in mind. It has come at great cost to lenders and industry practitioners alike. In fact, many industry players have simply chosen to exit residential real estate entirely rather than incur the overwhelming costs associated with compliance. Smaller local or regional banks are the first to come to mind. As attention is drawn to the actual costs of skyrocketing insurance premiums, technological on-boarding, and the potential liability associated with bona fide federal oversight for ALL industry practitioners, there will surely be more settlement service providers electing to opt out in the months and years to come. But is this necessarily a bad thing? Some say yes; TRID has a chilling effect on the housing industry and, as we know, a healthy housing industry promotes the overall economic climate. While others argue no; we are long overdue for a “culling of the sharks” and TRID accomplishes this by raising the standards of practice industry-wide. Perhaps both are right, at least in part. There are certainly unavoidable political undertones as well. The bigger question is, however; does TRID work?
TRID was designed to simplify the mortgaging process and its resulting costs for the consumer. As part of the CFPB’s Know Before You Owe initiative, it seeks to encourage comparison shopping by requiring several grace periods before a borrower becomes financially obligated for a mortgage debt. To do this, the CFPB has discarded the confusing and oftentimes unrealistic Good Faith Estimate of Closing Costs and the ironically dubbed Truth in Lending Statement forms previously used. Thankfully so because, before TRID, it was oftentimes heard around the closing table that “There’s not much good faith in a Good Faith Estimate” and “There’s not much truth in a Truth in Lending.” The HUD-1 Settlement Statement is also discontinued under TRID. They are all replaced with two similarly designed disclosures that have a much more user-friendly look. The first is the Loan Estimate (LE) which is provided to a consumer within three days of loan application. A lender is now prohibited from collecting any fees other than a credit report fee unless and until consumers have reviewed this Loan Estimate and documented their Intent to Proceed with the loan product offered. The second is the Closing Disclosure (CD) which must be actually received by the borrower (as opposed to merely delivered) a minimum of three business days before closing. Herein lies the most significant paradigm shift; at least on paper.
The intent of TRID is to eliminate the guess-work from home financing. It has been heralded as the higher standard to which lenders are now held. Gone are the days of not knowing the exact amount of closing costs until arriving at (and sometimes not until the end of) the actual closing. Borrowers now must “Know Before They Owe.” In fact, TRID requires the consumer to be accurately informed of their final closing figures at least three business days before closing! Gone also are the days of waiting for mortgage documents to be delivered to the settlement agent. Gone also are the days of “dry” closings or waiting on wired mortgage proceeds. Right?
Sadly, no. At least not during this transitional phase.
Certainly, a considerable learning curve was expected industry-wide. Recognizing this, the CFPB has announced a leniency in enforcement during this difficult, transitional phase. What was not so readily foreseeable however, is the current widespread practice of working around the TRID system as opposed to working within it.
As their first implementations of the TRID system, many (but not all) lenders have accepted as standard practice the issuance of “final” Closing Disclosures much earlier in the lending process than many would have initially expected. Surprisingly, Closing Disclosures are oftentimes being issued before a loan is actually “cleared to close” or even before a closing date has been confirmed. Think about that. How accurate can a Closing Disclosure be when a closing date has not even been set? Does this satisfy the intent of TRID? Under the new rules however, lenders may, in fact, reissue an amended Closing Disclosure (or multiples thereof) up until the actual closing as long as (among other unlikely limitations) the amendments do not increase the Annual Percentage Rate (APR) by more than 0.125%. Simply put, the widespread, initial, knee-jerk response to TRID is to issue an unrealistic Closing Disclosure as early in the lending process as possible, consider the new TRID regulations as satisfied, and continue with business as usual. Consequently, the average consumer still has no better grasp of the final amount due than before the implementation of TRID. Will “There’s not much closure in a Closing Disclosure” become the new mantra?
To be clear, it is not being suggested that lenders are purposefully participating in a deceptive scheme to circumvent consumer rights. It is quite the contrary. Lenders are keenly sensitive to the CFPB, its mission, and the importance of consumer advocacy. In fact, it is a matter of economic survival that they are equally aware of the potential cost of non-compliance and resulting CFPB enforcement actions. It is because of this intense pressure for compliance that an overly cautious, initial implementation of TRID has emerged. Consumers may not, in practice, have any better grasp of the extent of their financial obligations, at least not in New York. But it is safe to assume that the very real costs of adopting and implementing TRID within the industry will ultimately be passed along to them.
Before last October, we heralded the upcoming TRID regulations as the means by which to usher in a “golden age” of real estate. Realistically optimistic, we hoped that TRID would simultaneously ignite and legitimize a stalling industry. After the first few months of practice however, it is possible that the “trick” may have overshadowed the “treat.” With some meaningful clarification and guidance from the CFPB in the months (and years) to come, we can continue to hope that TRID may ultimately prove the “treat” for which the industry has so desperately craved.
Michael Ferruggia is a founding partner of the law firm of Ferruggia & Calisto, LLP with offices in Central Islip and Southampton, New York. Mr. Ferruggia represents an extensive base of institutional, corporate, and private clientele in real estate and mortgage lending transactions and litigation matters. Mr. Ferruggia has also served as an Adjunct Professor of Law at both the Patchogue and Bethpage, New York campuses of Briarcliffe College. In 2013, Mr. Ferruggia founded The New York Center of Real Estate (NYCORE); a fully accredited real estate school offering Continuing Education programs to real estate professionals. Mr. Ferruggia also currently serves as Counsel to the Board of the Hamptons North Fork REALTORS® Association (HANFRA).