The most common reasons investors and bond holders in the secondary mortgage market refuse to buy mortgages from originators are highlighted in a list published by the authoring attorney of the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) integrated disclosures (TRID) rules.
To recap: the new TRID rules, collectively called Know Before You Owe, are designed to protect consumers from onerous mortgages. The regulations, which became effective October3, 2015, require originating lenders to provide homebuyers with the generic Loan Estimate form, combining the prior TILA disclosure and Good Faith Estimate (GFE), within three business days after the lender receives a homebuyer’s mortgage application. [See RPI Form 204-5]
Further, originating lenders are to provide a Closing Disclosure which summarizes the “final” mortgage terms and details at least three days before the mortgage closes. [See RPI Form 402]
It is worth noting that the two sets of disclosures have been in place for decades, and were streamlined to better inform the homebuyer about the funds they are borrowing to purchase a home and encourage comparison between the two documents.
The new disclosures also mandate an extra three-day waiting period when the lender makes a significant change in the mortgage terms documented in the Loan Estimate. Some lenders have taken umbrage with TRID, alleging the timing requirements unnecessarily prolong the mortgage origination process and negatively impact closings. Conversely, the vast majority of homebuyers are more supportive of the new regulations.
Despite TRID’s success with homebuyers (who are the very participants the new regulations were designed to benefit), recent findings show some mortgage investors are rejecting TRID mortgages in the secondary mortgage market due to the following origination defects that indicate noncompliance with TRID rules.
1. The Loan Estimate and Closing Disclosure list the same date.
This is an irregularity that directly conflicts with timing requirements under TRID rules.
Lenders are required to deliver the Loan Estimate no later than three business days after receipt of the homebuyer’s application and at least seven business days prior to consummation of the transaction. [12 Code of Federal Regulations §§1026.19(a)]
However, when the lender receives new information about the property, the homebuyer or the mortgage terms (e.g., an appraisal, an updated credit report or a request for a change of terms by the homebuyer), the lender is to deliver a revised Loan Estimate within three business days after receiving the new information. [12 CFR §§1026.19(e)(3)(iv), (e)(4)]
The revised Loan Estimate may not be delivered on or after the date the Closing Disclosure is delivered. [12 CFR §1026.19(e)(4)(ii)]
While the Closing Disclosure needs to be delivered at least three business days before consummation of the mortgage, a revised Loan Estimate needs to be delivered no later than four business days prior to consummation — at least a day sooner than the Closing Disclosure. [12 CFR §§1026.19(e)(4)(ii), (f)(1)(ii)(A)]
Thus, a Loan Estimate that bears the same date as the Closing Disclosure indicates that, if the Loan Estimate was revised, the lender did not comply with TRID rules. When a Loan Estimate is not revised, identical dates still make it impossible for an investor to verify whether the Loan Estimate was provided to the homebuyer prior to delivery of the Closing Document.
2. Title fees are not formatted correctly on the Closing Disclosure.
TRID includes very specific format and language requirements for the content of the statutory Closing Disclosure. For example, the controlling code requires any title insurance fees be preceded by “Title — ” with an em dash spaced on both sides. [12 CFR §1026.38 (g)(4)(i); see RPI Form 402 §C]
Seemingly innocuous technical errors like a missing space or incorrect dash type are still red flags to mortgage investors who are looking for infallible conformance.
3. The Closing Disclosure is missing contact information.
The Closing Disclosure requires contact information for all participants of the transaction, including the lender, mortgage broker, real estate broker (buyer’s and seller’s) and escrow agent involved in the transaction. [12 CFR §1026.38(r); see RPI Form 402, Page 5]
Missing information, especially a broker’s California Bureau of Real Estate (CalBRE) license number, is a critical defect the secondary mortgage market investors look for when buying TRID mortgages.
4. Alternative Closing Disclosures fail to show subordinate financing.
The Consumer Financial Protection Bureau (CFPB) permits use of an alternative Closing Disclosure for transactions that do not involve a seller (i.e., refinances and home equity loans).
However, for a transaction involving multiple mortgages (one in a first position and another or multiple in a junior position), there is no requirement for the alternative form to include the cash to close for the subordinate mortgage. This requires the escrow agent to total the cash needed to close the transaction for each mortgage separately and then determine where to include the total amounts, or use two separate forms.
The missing information does not present mortgage investors with a full picture of the ultimate condition of the financing and creates an opportunity for untraceable miscalculations — contrary to the objectives of TRID.
5. The title company’s file number is missing.
Each mortgage transaction is assigned a file number used to trace the mortgage through the entire application and origination process. Think of it as a financial fingerprint that is unique to the transaction. The file number needs to be included on the Closing Disclosure. [12 CFR §1026.38(a)(3)(v)]
Failure to include the file number prevents proper identification of the mortgage transaction, triggering a risk to investors who buy the mortgage in the secondary mortgage market.
6. Third-party authorization forms are used.
Some mortgage files include third-party authorization forms signed by the homebuyer, releasing their nonpublic, personal information to their real estate agent to permit them access to the homebuyer’s Closing Disclosure for further consultation before closing.
However, mortgage investors are rejecting these mortgages since they view these forms as not in compliance with privacy and information protection laws.
This issue — a concern for buyer’s agents aiming to fulfill their fiduciary duties — is still awaiting further guidance by the CFPB.
7. The Closing Disclosure is not provided.
Escrow agents are foregoing delivery of the Closing Disclosure to sellers altogether, instead providing sellers with the obsolete HUD-1 Settlement Statement or ALTA Settlement Statement that were previously required before TRID went into effect at the end of 2015.
However, TRID rules do not allow the use of these outdated forms in lieu of the newly mandated Closing Disclosure. The “new” forms are now the industry standard.
8. Escrow agents are not following simultaneous issuance rules for title insurance.
In California, sellers typically pay title insurance premiums to insure their grant deed for the sale in mortgage transactions.
When the homebuyer pays, they often receive discounted title insurance premiums for the simultaneous issuance of policies to both the homebuyer and the lender. TRID rules provide a specific method for calculating these premiums on the Loan Estimate which does not include the discounts for simultaneously issued policies. [12 CFR §1026.37(g)(4)]
The CFPB enforces this calculation in an effort to:
- standardize premium calculations across all states; and
- avoid homebuyer confusion when the distribution of costs between the two premiums varies based on whether the homebuyer elects to purchase a title insurance policy.
However, some escrow agents are not properly applying this calculation in accordance with TRID regulations since it does not accurately represent the discounted premiums actually charged.
9. The “Optional” designation is used incorrectly.
The Closing Disclosure includes an “Other” section where any additional fees paid by the homebuyer are listed. Costs agreed to by the homebuyer and paid at or before closing, such as premiums for separate insurance, warranty, guarantee or event-coverage products, are indicated with an “(optional)” description. [12 CFR §1026.38(g)(4); see RPI Form 402 §H]
However, applying the “optional” designation to transaction fees already included on the form is an incorrect use of the description as it duplicates existing fees.
10. Fee names on the Loan Estimate and Closing Disclosure are mismatched.
TRID rules require consistent terminology across both forms so the homebuyer and their agent can seamlessly compare the two sets of data for dollar changes made by the lender. [12 CFR §1026.38(h)(4)]
Thus, any fees included on the Loan Estimate need to bear the exact same title or name on the Closing Disclosure. For example, a “credit report fee” is to be listed as such on both the Loan Estimate and Closing Disclosure, with no variations in wording. Different names for the same fee create ambiguities and send up red flags for investors.
A heads up to agents
While TRID regulations were enacted to benefit the homebuyer and not mortgage originators or secondary mortgage market investors who buy originations, inability for originating lenders to sell their mortgages in the secondary market has widespread consequences. The originator’s resale of a mortgage is an integral component of their business practice and of today’s mortgage market. Resale in the secondary mortgage market provides liquidity to the ecosystem and ultimately increases the availability of mortgage funds to homebuyers.
When originating lenders are unable to sell their mortgages — and at optimal prices for full compliance — origination costs and interest rates to all homebuyers increase. More importantly, originating lenders need to have staff which ensures their TRID compliance if the lender is to avoid delays and disruptions for your homebuyers.
As a buyer’s agent, help avoid TRID violations (deliberate or inadvertent) by paying close attention to your homebuyer’s Loan Estimate and Closing Disclosure to spot these common irregularities. In a few minutes, you will have cleared the Closing Disclosure or noted and sought the correction of errors — which the lender and escrow can cure, keeping the transaction on an even keel and the closing date intact.