How TRID impacts hard money lenders. Or: On how to best approach hard money lending in the post-TRID world
TRID regulations will have both a positive and negative impact on hard loan investing.
TRID, also known as the “Know Before You Owe” rule or the TILA-RESPA Integrated Disclosure Rule, is excellent for consumers but slightly more laborious for lenders.
Any hard money lenders who transacts five or more loans a year will need to include details of commercial bridge loans in the TRID documents.
What this means is a real-estate deal that provides a great deal more transparency to the client and somewhat more work for the investor.
In a pre-TRID world, investors simply required a Note and a Deed of Trust. Other documentation requirements varied but generally included a personal guarantee from the borrower; personal financial statements such as past tax returns and proof of income; and assurance that the borrower had the funds to rejuvenate and maintain the property. The proof of evidence lay largely on the borrower.
Now, TRID insists that the lender has to requite that trust by showing his calculations to the client.
Since October 1st 2015, all residential real estate transaction requires that the lender submit to the client two new forms: the Loan Estimate and the Closing Disclosure (a statement of final loan terms and closing costs). The client has to receive these forms within a certain time, and the loan can only be consummated once the client understands and is satisfied with the lender’s decision.
Details of the New Documents
The Loan Estimate form uses simple language to summarize the Good Faith Estimate (GFE) and the Truth in Lending Disclosure sections for the client and explains the loan’s key features, costs and risks.
The Closing Disclosure form summarizes the final Truth-In-Lending statement and the HUD-1 settlement statement, again using language that makes it easy for him or her to understand and providing him with a detailed account of the entire transaction, including projected monthly payments, fees, and other costs.
The lender is responsible for preparing the Closing Disclosure (although a settlement agent may do it if the agent is compliant with the Final Rule’s requirements for the Closing Disclosure). The Closing Disclosure will also contain additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.
The 2000-page instructions contain other regulations that tell the lender how to format and word the documents.
TRID insists that the client get the Loan Estimate at least three business days after applying for a loan – which means at least three business days after the consumer provided the lender with details such as name, income, Social Security number, property address, and the required loan amount for the mortgage. The client, too, must receive the Closing Disclosure at least three business days before loan consummation (when the loan becomes contractually binding). In short, the lender should prepare him for at least a 14-day wait before a loan can legally go to closing and sometimes longer if either the borrower or the lender finds it necessary to delay the closing.
Any significant changes to the loan terms – such as APR increase of more than 1/8 of a percent for fixed-rate loans, or 1/4 of a percent for adjustable loans; a prepayment penalty, or changes in the loan product – cause the three-day interim period to start again.
Finally, the only fee the lender can impose on the client is a reasonable sum for obtaining a consumer’s credit report, until the client has received and reviewed both forms and agreed to proceed.
How can the lender prepare?
Lenders are told to review policies and procedures, in addition to changing the way they track and modify disclosures. Pre-application estimates, compliance tests and reporting requirements will be impacted by the rule.
Lenders are also advised to prepare clients for the changes. Both lenders and clients may experience confusion and delay with documents and procedures and some lenders may find that they have to hire assistance in order to fulfill the requirements. Lenders are told to keep the new timelines in mind when drawing up contracts, to coordinate closings carefully, and to avoid last minute changes. Lenders should also encourage the client to thoroughly review the document and to disclose all concerns. Initially, loans and purchases may take longer to close. The lender should explain the situation to the client.
Incidentally, both lender and client may benefit from resources published by the CFPB and the Mortgage Bankers Association that provides further information and that try to simplify the process.
Reaction to the TRID
Some real-estate agents have lambasted the change declaring that the loan documentation costs those billions to prepare. Typical reactions included an article in the Wall Street Journal that shrilled that “the rest of the year could be marked by delayed closings, frustrated borrowers and confused real-estate professionals as they adjust to the new rules.”
It is true that banks and lender may have longer timelines and delayed closing dates because of the steeper learning curve. But in time, the reality may not so bad. Lenders may initially find themselves with more work and somewhat larger technical hurdle but TRID could benefit hard money lenders almost a much, if not as much, as it benefits the buyer.
This new loan documentation could lead to stronger customer-lender relationships as the lender explains the new forms, is upfront about consumer protection guidelines and clarifies the details.
It could also transform the closing table from a nightmare experience with piles of documents to review for the first time into a more manageable (although still slightly bad experience) of compiling, reviewing and signing a few concluding forms.
The real advantage is for the buyer who will have more trust in the procedure since TRID simplifies loan documentation, clarifies loan terms and fees, and avoids unpleasant surprises at the end. In the long run too therefore, it may also benefit the lender since, rightly or wrongly, hard money lending has a certain stigma that intimidates borrowers. The TRID may well be a blessing in disguise.