Anyone who has financed the purchase of residential real estate property recently is familiar with the almost insurmountable stack of documents that is set before them prior to taking title.
This is a result of the Dodd-Frank Act which requires Lenders to follow a series of guidelines to protect consumers.
Here we’ve provided a brief overview of the 2 most important disclosure statements – the Loan Estimate and the Closing Disclosure forms.
TRID Disclosure Forms
The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to issue various disclosures that integrate the residential mortgage loan disclosures that borrowers customarily get under the Truth in Lending Act (TILA) with the Real Estate Settlement Procedures Act (RESPA). This rule is known as the TILA/RESPA Integrated Disclosure Rule, or TRID.
TRID applies to most residential mortgage applications received by Lenders on or after August 1, 2015 except for home equity lines of credit, reverse mortgage, mortgages secured by a mobile home (or dwelling that is not attached to the land), mortgages by lenders who make five or fewer mortgages per year, and various types of second mortgages.
Lenders are strictly obligated to use specialized forms when providing consumers with the required disclosures.
The main obligations to Lenders pertain to the Loan Estimate and Closing Disclosure. The following provides a general description of each of these documents to be used as a guide by borrowers who may be unfamiliar with the rule.
The Loan Estimate
At the commencement of the loan application process, Lenders must provide borrowers with a Loan Estimate using the standardized form that combines the Truth-in-Lending stated with certain statements included in the RESPA Good Faith Estimate. They also include disclosures regarding the Total Interest Percentage (total amount of interest paid by the borrower over the life of the loan), the appraisal notice and the servicing notice.
This Loan Estimate form is used for fixed-rate loans, loans with balloon payments, interest-only or adjustable-rate loans, as well as, negative amortization loans. It must be provided to the borrower not more than three business days after receipt of the borrower’s application and not less than seven business days before the completion of the transaction.
It should be noted that “business days” have slightly different means for each of these deadlines. At the beginning of the process, it is defined as any day the lender is opened to the public and at the end of the process (i.e. closing disclosure), it means any calendar day except Sundays and legal public holidays.
The purpose of the Loan Estimate is to provide a good faith estimate of the expected costs and terms in an itemized format.
All origination charges, including any application fee, origination fee or underwriting fee, must be itemized on the form. Other itemized charges include discount points, charges paid by the creditor to pay for a loan-level pricing adjustment, as well as, compensation paid to mortgage brokers.
It’s worth noting that the Lender may impose a credit report fee prior to issuing the estimate, but may not require a borrower to produce documentation until such borrower has indicated an intent to proceed after having reviewed the Loan Estimate.
An estimate is considered to be given in good faith if the amount paid by the borrower does not exceed the amount originally quoted by the Lender. While most charges may not be increased, TRID rules permit increases in certain circumstances, such as some third-party fees for a maximum increase of 10%, prepaid interest, property insurance premiums etc.
The Closing Disclosure
All financed residential purchases must be accompanied by a standardized Closing Disclosure form which combines disclosures found in the Truth-in-Lending statement with disclosures found in the RESPA HUD-1 or HUD-1A form. For a line-by-line explanation of the Closing Disclosure form, be sure to review our article Closing Disclosure Forms 101.
The Closing Disclosure form must be received by the borrower no later than three business days prior to the closing of the sale. “Business days” include all calendar days except Sundays and legal holidays. Lenders and title agents usually work together to ensure that all figures are accurate and available to be presented to the borrower by the mandated deadline.
A Closing Disclosure must state the exact terms of the loan and all costs associated with the settlement of the purchase transaction. The terms of the loan contained in the Closing Disclosure statement must match those disclosed in the Loan Estimate to comply with TRID rules. However, the Closing Disclosure form includes additional information such as compensation to the loan originator or mortgage broker, realtor fees, community association fees owed, home warranties, and inspection fees among others.
Often times changes are necessary after the final Closing Disclosure is provided to the borrower. The Lender may provide a Revised Closing Disclosure but would be required to extend the three-day waiting period in cases where the revision is due to a change in the annual percentage rate, a change in the loan term or the addition of a prepayment penalty.
Despite the millions of financed residential real estate transactions that have taken place since the implementation of the new TRID rule, the forms still cause a great degree of confusion among borrowers.
The preceding information serves as a basic introduction to the two main disclosure forms a buyer may expect to receive from their Lender.
An experienced attorney can assist any Florida borrower who is about to close on a residential property to navigate through these documents from their Lender. We at ASR Law Firm are available to help!
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