When you’re buying a home, you want all the details you can get. As of October 3, 2015, new regulations will require lenders to provide consumers with new mortgage rate and fee quote documents, with more time built into the process for reviewing them. Here’s an overview.
Consumers financing homes in the U.S. are protected from fee abuses by two regulations:
The Truth In Lending Act (known as TILA or Regulation Z) protects consumers from closing cost abuses by standardizing the way mortgage terms and fees are calculated and disclosed.
The Real Estate Settlement Procedures Act (known as RESPA or Regulation X) protects consumers from artificially inflated real estate transaction costs by prohibiting different housing services providers — such as lenders, real estate agents, title companies, escrow companies, attorneys, and insurance companies — from paying each other fees to refer consumers to each other.
TILA and RESPA were created in 1968 and 1974, respectively. Enforcement of these regulations has since been transferred to the Consumer Financial Protection Bureau (CFPB). This agency was created in July 2011 in response to the 2007-2008 financial crisis to consolidate all of the government’s consumer-facing financial protection agencies under one umbrella.
As of October 1, 2015, the CFPB will combine consumer mortgage disclosures mandated under TILA and RESPA into two simple forms. This initiative is called the TILA-RESPA Integrated Disclosure Rule, often referred to as TRID.
The disclosures are better, but the process will be slower, as detailed below.
The new disclosures
Today, consumers must receive two sets of disclosures when getting a mortgage — one set at the beginning and one set at the end, as follows:
Within three days of you applying for a home purchase loan, the lender must send you a Good Faith Estimate and an Initial Truth In Lending disclosure, which together show your quoted rate, sum of fees, terms and costs over the life of the loan.
Before closing (even if it’s the day of closing, which it often is), the lender must send you a HUD-1, which is a line-item breakdown of all fees for the transaction, including final cash needed to close, and a final Truth In Lending disclosure so you can see if it’s different from the one you saw in the beginning.
The CFPB deemed this process too confusing for consumers because, under today’s process, the first time a consumer sees a formal breakdown of all fees is on the HUD-1, when they come to the closing table. By then it may be too late, or the consumer may feel too pressured, to make changes.
Therefore, under the new TRID rules effective with all new applications October 1, consumers will receive two disclosures — one at the beginning and one at the end, as follows:
Within three days of you applying for a home purchase loan, the lender must sent you a Loan Estimate Form, which provides a detailed line-item breakdown of fees, cash needed to close, rate, terms and costs over the life of the loan. The lender must also obtain your intent to proceed before they can move forward.
At least three days before closing, the lender must send you a Closing Disclosure Form, which looks almost exactly like the Loan Estimate, but also separates which costs are paid by the buyer, seller, and third parties. This means you’re reviewing final terms in the same format you saw initially, and you’ve got time to digest it.
That extra time, while intended as a consumer protection, adds time to the closing process. Talk to your lender about their process for handling the new rules.