Understanding the TILA-RESPA Integrated Disclosures
Toward the end of the home buying process, when a home buyer meets with the lender and seller to negotiate terms and finalize the mortgage agreement, it has always been good practice for the lender to disclose estimates that detail which fees home buyers will have to pay both at closing and over the life of the loan.
These “good faith estimates” were to ensure that there were no surprise fees and that homeowners could make sure they were able to afford their home loan.
As of October 3rd, 2015, however, good faith estimates were replaced with a more modern update. Enter TILA-RESPA Integrated Disclosures (TRID), the new disclosures for any fees related to home purchase transactions.
What are TILA-RESPA Integrated Disclosures?
While it may sound like some exotic strain of bacteria, TILA-RESPA is actually a combination of two acronyms that represent the two regulations that govern the disclosure’s rules and purpose.
The Truth in Lending Act (TILA)
The Truth in Lending Act or “TILA” (sometimes known as the Consumer Credit Protection Act) was created in 1968 as a federal law designed to ensure “the informed use of consumer credit”. This was meant to standardize the way borrowing fees were addressed and calculated.
TILA actually covers more consumer rights, such as the right to cancel applicable credit transactions where a lien is placed on the consumer’s primary residence, and giving consumers the right to resolution of disputes regarding credit billing in a fair and timely manner.
While important, the major focus of the law was to require standardized disclosures of costs and charges, which would inform consumers and allow them the option of shopping around for alternatives.
The Real Estate Settlement Procedures Act
Effective since 1975, the Real Estate Settlement Procedures Act (RESPA) was created in order to protect consumers against false, inflated pricing when entering a home loan transaction. The act prohibits service providers in the housing and home loan industry (including but not limited to: realtors, lenders, insurance companies, title agencies, escrow companies and attorneys) from partaking in paid referrals between themselves in order to inflate prices artificially and monopolize the consumer base.
Much like TILA, however, a major function of the act is to require these service providers to supply borrowers with “pertinent and timely” disclosures about the nature and costs of the real estate settlement process.
TILA-RESPA: The Disclosures Explained
The two acts were merged together on October 3rd, 2015 under the TILA-RESPA Integrated Disclosures rule (TRID) or “TILA-RESPA Initiative”. Enforcement of the initiative falls to the Consumer Financial Protection Bureau (CFPB), which was founded back in in 2011. The disclosures of today come in two simple forms for easier consumer understanding.
The Loan Estimate Form
TRID requires consumers to be given the first disclosure, the “loan estimate form”, at the beginning of the loan transaction (no more than three days after applying for a home purchase loan). The loan estimate form is meant to disclose a breakdown of any fees, cash needed at closing, applicable rates, terms, and any other costs over the life of the loan in a line-item format.
The Closing Disclosure Form
Nearly identical to the loan estimate form, consumers are supposed to be provided with a “closing disclosure form” within three days of closing on a home loan transaction. This form, however, gives a more detailed breakdown of the fees, including the parties responsible for paying each item (e.g., the buyer, seller or any other third party involved in the transaction). Since the closing disclosure form so closely resembles the loan estimate form, it gives the consumer one last chance to truly comprehend the fees and terms of the loan agreement before finalizing the deal.
How can costs change from the Loan Estimate Form to the Closing Disclosure Form?
While the two forms contain mostly the same information presented in the same way, it’s not uncommon for some of the figures to change from one form to the next. During mortgage agreements circumstances can change, and prices can rise or fall as a result. Lenders are expressly prohibited from undervaluing prices on either form. Additionally, there are some fees that cannot be altered after the Loan Estimate Form is issued, and some that are out of the control of all parties involved.
Some fees on TRID forms are locked-in, unless a change in circumstance occurs. A “change in circumstance” is any action which fundamentally alters the original loan agreement (or basis for determining eligibility) including, but not limited to: deciding on a different loan type, changing the loan amount, taking out a new loan, or missing a loan payment.
Fees that can change on TILA-RESPA Integrated Disclosures
Interest Rate: If an interest rate was never locked in, it could be changed at any time. Even a “locked-in” rate can change if the closing does not happen within the allotted rate-lock time period.
Closing Costs: Closing fees that can be changed are divided into two tiers:
Costs that can be changed by any amount, and are not dictated by the lender:
Initial Escrow Deposits, Prepaid Interest, Property Insurance Premiums
Fees accrued for a service required by the lender that you choose a third unaffiliated party to undertake at your own discretion
Fees for third party services that are not required by the lender
Costs that may only increase by up to 10% (Unless a change in circumstance occurs, wherein these fees can change by any amount)
Fees charged by third party service providers on a lender-approved list for services required by the lender. If the third party is an affiliate of any kind, the fees cannot be changed)
Fees that cannot change on TILA-RESPA Integrated Disclosures (unless there is a change in circumstance)
Fees paid to the broker or lender (or affiliates of either) for required services
Fees for services required through a third party that the borrower was not able to shop separately for, and the provider is NOT an affiliate of the lender.
Speak with a Specialist
Good faith estimates are now a whole lot simpler and more reliable with the transition to TILA-RESPA Integrated Disclosures. Always be sure to read through your Loan Estimate Form and Closing Disclosure Forms thoroughly. Check for any changes in costs or terms and never be afraid to discuss them with your lender.
Of course, the home.loans team will always be standing by to answer any questions that may come up about your disclosures or closing in general, all you have to do is fill out a simple form, and a home loan specialist will get in touch with you! Full disclosure: It's actually our passion to inform.