TILA-RESPA Integrated Disclosure
This year, the Consumer Financial Protection Bureau (CFPB) begins requiring banks to provide consumers with a longer window in which to review loan documentation. The new TILA-RESPA Integrated Disclosure, potentially in effect October 3, 2015, can push closing by as many as six days—to more than a week—longer than usual. Buyers needing to close quickly may need to begin negotiations sooner in order to meet a move-in deadline.
Conversely, the changes could give an advantage to all-cash buyers overt those needing conventional financing, since sellers looking to close quickly may choose a faster close over a higher take. In a hot seller’s market, cash may be king for the buyer.
Here’s a breakdown of the new ruling:
Originally slated to roll out August 1, in October, the federal government will require that loan disclosure documents contain a combination of both the Real Estate Settlement Procedures Act (RESPA) and the Federal Truth in Lending Act (TILA) in a document known as the TILA-RESPA Integrated Disclosure (TRID). The ruling, known as “Know Before You Owe” must accompany the Loan Estimate and include all charges, fees and line items at least three (business) days before closing. In the past, this information was given to consumers on the day of closing on the HUD-1 form (which no longer will be necessary).
The purpose of the changes is to mitigate the potential for surprises at the closing table and offers an advantage to buyers since any increase of more than one-eighth of a percent during the three-day window—or other changes such as pre-payment penalties, additional fees or other items that increase the consumer’s financial responsibility—requires entirely new documentation and another three-day window. Note that a decrease in interest or fees will not cause such a delay.
According to the CFPB the new TILA-RESPA Ingegrated Disclosure forms are easier to understand and use. During testing, participants returned more correct answers about their sample mortgage using the new forms as compared to the traditional forms. The new form lists the total loan amount, interest rate, monthly principal and interest and projected payments on the first page of the form. Closing costs and cash required to close appear at the bottom of the easy to read page.
Specifically, the first section on the face of the document clearly indicates if the amount of the loan, interest rate and monthly principal and interest can increase after the closing, and prepayment penalties and balloon payments are plainly indicated.
In the second section, projected payments for the life of the loan, including the years in which increases may occur, gives the buyer the needed information to plan for the future.
The primary advantage for home-buyers is that the three-day window allows them to walk away from a deal without penalty in certain circumstances and allows them to more quickly understand the terms of their mortgage.
A disadvantage for those needing to close quickly is that bankers, mortgage lenders, escrow officers and other real estate professionals will need to learn the new documentation and set up computer software and other systems to prepare it.
If you have questions about the new forms and how to understand them, I would be happy to talk with you about it or contact your real estate professional for advice and information. When buying a home with a mortgage this fall, be certain to calculate additional time in closing to accommodate the new ruling.
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