(As published in ABA Bank Compliance magazine in Janary 2019)
We’re now a few months past the mandatory effective date of “TRID 2.0,” and many mortgage lenders may be lulled into thinking it’s back to business as usual. However, with a regulatory initiative as massive as TRID, now is an ideal time to circle back and ensure your implementation efforts hit the mark, are in compliance, and that your disclosures match your actual policies and practice.
This article will review the TRID 2.0 amendments with an eye towards a few disclosure requirements that represent potential compliance risk. It will also discuss potential enhancements to TRID and future regulatory change. Could TRID 3.0 be on the horizon?
Setting the Stage
Compliance with the July 2017 amendments to the TILA-RESPA Integrated Disclosure (TRID) rule became mandatory on October 1, 2018. Dubbed TRID 2.0, these amendments provide technical corrections, clarifications and substantive changes to the original TRID rule that went into effect in October 2015.
At this juncture, much has been said and written about TRID 2.0 implementation. From a regulatory perspective, the Bureau of Consumer Financial Protection (“bureau”) itself has chimed in. The TRID 2.0 final rule contains a preamble that spans hundreds of pages and offers detailed discussion regarding compliance expectations. In addition, the bureau updated both the Small Entity Guide and the Guide to Forms to reflect the TRID 2.0 changes.
Clearly the industry is well-positioned to know “what” TRID compliance requires. Now the tide turns to managing the “how” and ensuring steps are taken to limit the risk of noncompliance.
TRID 2.0 Compliance Risk
Cooperative Units: TRID 2.0 provides much-needed clarification regarding mortgage loans secured by a cooperative unit. It creates a uniform rule whereby all closed-end consumer credit transactions (other than reverse mortgages) secured by a cooperative unit are covered—regardless of whether the unit is considered real or personal property under state law. Most TRID loans secured by a cooperative unit now trigger a Loan Estimate, a Closing Disclosure, the Special Information Booklet, and the record retention requirements.
Risk Management Considerations: If you classify a cooperative unit as personal property for other purposes, ensure that your workflows and software systems are updated for TRID coverage. Also verify that staff is trained and understands the TRID impact on loans secured by a cooperative unit. Finally, ensure that you do not mix and match disclosures, for example, providing a non-TRID Good Faith Estimate or other early disclosure with a TRID Closing Disclosure.
Subordinate Lien Housing Assistance Loans: Currently, certain housing assistance loans may be exempt from TRID if six specific criteria are satisfied. TRID 2.0 modifies one of the criteria regarding costs payable by the consumer. The modification provides that transfer taxes, along with recording, application, and housing counseling fees, may be payable by the consumer. In addition, recording fees and transfer taxes are now excluded from the one percent cap on total costs payable by the consumer at consummation.
Risk Management Considerations: If relying on an exemption from TRID, ensure that evidence of compliance is retained documenting the limit on the types of costs payable by the consumer and adherence to the cap on total costs payable by the consumer. This documentation should be retained in the loan file for examiner review and is not required to be provided to the consumer.
Also, verify that your organization has determined which Truth-in-Lending disclosures it will provide for such housing assistance loans. Although housing assistance loans may be exempt from TRID disclosures, they are nonetheless federally related mortgage loans that are otherwise covered by Regulation Z. This means that the “Fed Box” disclosures as outlined in section 1026.18 of Regulation Z would apply. In lieu of the “Fed Box” disclosures, lenders have the option of providing the TRID disclosures.
Right of Rescission: TRID 2.0 clarifies that with respect to the Closing Disclosure, only disclose the consumer’s name and mailing address under “Borrower.” The Commentary now specifically provides that the term “consumer” is limited to parties to whom the credit is offered or extended. While other parties to the transaction may have rescission rights because they’ve offered property as security for a loan, those rights do not create “borrower” status.
Risk Management Considerations: Although not necessarily a new concept, ensure that staff is trained to understand the difference between a “borrower” and a party with rescission rights only. Labeling a party with just rescission rights as a “borrower” may infer repayment obligations and could be deemed deceptive.
Remember that rescission provisions are independent of the TRID disclosure timing requirements. Those with the right of rescission have three business days to rescind the transaction, typically starting from the date the final Closing Disclosure is provided. Ensure your closing workflows and timelines reflect the three-day right of rescission.
Fees and Tolerances: TRID 2.0 clarifies that for purposes of meeting the “good faith” standard, certain charges paid to an affiliate of the creditor are an unlimited tolerance item. These certain charges are prepaid interest, property insurance premiums, amounts placed in impound accounts, charges paid to a third-party service provided selected by the consumer that were not included on the lender’s Written List of Providers, and charges for third-party services that are not required by the lender. Note that while subject to unlimited tolerance standards, the above charges must be disclosed in good faith using the best information reasonably available.
In addition, TRID 2.0 addresses the tolerance threshold for a non-compliant Written List of Providers. TRID requires that the providers disclosed on the written list correspond to the required settlement services for which the consumer may shop, as disclosed on the Loan Estimate. If you fail to provide a compliant, Written List of Providers, fees that would have otherwise been in the “no tolerance” category because the borrower selected their own provider, will instead fall in the 10 percent category and, potentially, the zero percent category if paid to an affiliate.
Risk Management: Regularly train staff on the importance of disclosing fees that are legitimate, using the best information reasonably available. Tolerance violations may trigger costly cure provisions. In addition, failure to disclose fees and/or disclose a compliant, Written List of Providers could be deemed a Regulation Z violation.
Post Consummation Notices: As required pursuant to other Regulation Z provisions, certain loans trigger a notice in connection with the cancellation of an escrow account and a disclosure regarding the partial payment acceptance policy in a mortgage loan transfer notice. TRID 2.0 clarifies that if such post-consummation notices are required, they must be provided regardless of the loan application date. Previously, the post-consummation notices were only required for covered transactions if the application was received on or after October 3, 2015 (TRID effective date).
Risk Management Consideration: Verify that workflows and documentation systems are updated to address the post-consummation notices for all covered loans, regardless of the application date.
Total of Payments Tolerance: TRID 2.0 now subjects the Total of Payments (TOP) disclosure to tolerance testing. The Total of Payments disclosure will be considered accurate if the amount disclosed is overstated or if the amount is understated by no more than $100. This is the same accuracy standard used in calculating and disclosing the finance charge.
Risk Management Consideration: Ensure that you regularly perform tolerance testing. Understatements of the TOP that are greater than $100 violate Regulation Z and may extend the right of rescission time period.
Numerical Rounding: TRID 2.0 provides for a new requirement when rounding percentages. Disclosures involving a percentage must be rounded at three decimal places, with all trailing zeroes to the right of the decimal place dropped. So, for example, a 2.4999% APR will be rounded to and disclosed as 2.5%, while a 7.000% APR will be disclosed as 7%. With respect to dollar amounts, several disclosures must be rounded to the nearest whole dollar. And when it comes to disclosures involving a zero amount, note that in the “final” column of the Cash to Close table, if the calculation yields a zero, that should be disclosed as a single digit—i.e. $0, not $0.00. However, for prepaid interest in the “Other Costs” table—if no prepaid interest will be collected at consummation, the amount should be disclosed as “$0.00.”
Risk Management Consideration: It’s a picky point, but the rounding provisions do vary within the TRID rule and within the Loan Estimate versus the Closing Disclosure. Ensure that your systems are generating figures that reflect the proper rounding requirements, and periodically audit your calculations.
Tolerance Cures and Principal Curtailments: TRID 2.0 clarifies how principal curtailments (reductions) may be disclosed, and it allows for the disclosure of such a reduction instead of a lender credit when providing a tolerance cure. Such principal reductions may be disclosed in the Summaries of Transactions table on the standard Closing Disclosure or in the Payoffs and Payments table on the alternative Closing Disclosure. In either case, curing the violation with a principal reduction will trigger additional disclosures.
Risk Management Consideration: There is some confusion over whether a principal reduction should be disclosed on line K4 or K5-7 of the Summaries of Transactions table. This confusion stems from the fact that one regulatory provision covers both line K4 and K5-7, and it doesn’t specify use of one line over the other or prohibit the use of one line over the other. However, given the “adjustments” title prior to lines K5-7, it seems these lines should be limited to contractual adjustments between borrower and seller and principal reductions should be disclosed on line K4. Confirm with your compliance team and documentation provider how your organization will handle the principal reduction disclosure. .
Revised Disclosures: TRID 2.0 addresses both revised Loan Estimates and revised Closing Disclosures. With respect to the Loan Estimate, if you issue a revision after the consumer indicates an intent to proceed with the transaction, you do not need to complete the expiration of closing costs date and time fields on that revised Loan Estimate.
In addition, TRID 2.0 makes clear that a revised estimate may be provided merely for informational purposes versus a revised estimate used to reset fee tolerances. Note, however, that any revised Loan Estimate—whether to reset tolerances or for informational purposes—must update all fee disclosures using the best information reasonably available.
On the Closing Disclosure side, if the Closing Disclosure becomes inaccurate post‐closing, and the only reason for the inaccuracy is due to per diem interest, then a corrected Closing Disclosure is not required. If the Closing Disclosure is inaccurate post‐closing for reasons other than the per diem interest, and the per diem interest is likewise inaccurate, then the per diem must be accurately disclosed on the corrected Closing Disclosure.
Finally, in addition to TRID 2.0, the Bureau issued a final rule closing the “Black Hole” when using a Closing Disclosure to reset fees. Here’s the scenario: Once the initial Closing Disclosure has been issued, a revised Loan Estimate can’t be issued. The Closing Disclosure may be used to reset tolerances. However, the revision of fees must be done within three business days of learning of the event that triggered the revision. Furthermore, a disclosure that revises fees must be provided no later than four business days prior to consummation. The “black hole” is the gap between the end of the three business days period after learning of a change event, and the start of the four business days period prior to consummation. To make a long story short, the “Black Hole” final rule removes the four business days prior to consummation limitation when using a Closing Disclosure to reset tolerances.
Risk Management Consideration: If you provide an informational revised Loan Estimate, ensure that the entire revised estimate is updated. Also monitor change events and the impact on fees carefully. Ensure staff understands that a Closing Disclosure may be used to reset tolerances without regard to the four business days prior to consummation limitation. Resetting tolerances where permitted can help avoid implementing cure provisions and potential Regulation Z violations.
On the Horizon
While TRID 2.0 provided a fairly good clean-up of TRID 1.0, areas of uncertainty and contention remain. At the top of the list are construction loans. TRID 2.0 does provide much needed guidance regarding how to disclose a construction loan, including updates to Appendix D and a section dedicated to compliance in the Small Entity Guide. However, many in the industry continue to struggle with disclosure of such loans. Lenders are asking the Bureau for an exemption from TRID requirements for single-family residential construction loans. Citing consumer confusion and disclosure burden that is forcing many lenders out of the construction loan market, the industry is asking that at a minimum, the Bureau reduce liability enforcement. From there, lenders hope the Bureau would consider adopting a more streamlined disclosure process whereby lenders can disclose basic information using a format of their choosing.
Along the lines of enforcement, the industry is also asking that the Bureau expand the ability to cure minor TRID errors. While TRID does provide measures for revising fees and resetting tolerances, many believe provisions to “fix” a problem are too burdensome and complex and must be simplified. The industry is also requesting an amendment that would extend the time to cure a violation after consummation. Such an extension would provide lenders more time to carefully review loan documentation post-consummation and make necessary corrections and refunds. While the Bureau may consider such requests, there is regulatory concern that additional cure provisions could reduce the incentive to comply with the TRID rule.
Needless to say, the industry hasn’t heard the last word on TRID as compliance requirements and expectations will continue to evolve. There is talk of repealing the Dodd-Frank Act altogether and thereby repealing TRID. Despite the new administration and a change in the bureau’s leadership, this might be wishful thinking at best. Institutions have dedicated significant resources toward TRID compliance, and who knows what might take its place if it were repealed. In the meantime, organizations should understand that compliance implementation is an ongoing process requiring continuous document review, policy and procedure audit and staff training. And despite political rumblings, institutions must stay the course and carefully manage TRID compliance and risk.
ABOUT THE AUTHOR
Sue Burt is a senior compliance consulting specialist with Wolters Kluwer. Her thorough knowledge of the bank regulatory environment is based on more than 30 years of industry experience. In her role with Wolters Kluwer, Burt uses her expertise to assist financial institutions in addressing compliance and other operational risk management issues.