Importance of the Application Under the New TRID Rules

Issue/Inquiry

The Bank asks how important the application is under the consolidated TILA-RESPA rules. Can it simply send out the Loan Estimate when it receives an application, whether it is complete or not, to be sure that it has provided the disclosure in a timely manner?

Response Summary

Under the consolidated TILA-RESPA rules (“TRID”) going into effect on August 1, 2015, the application is important. The Bank must send out or deliver the Loan Estimate within three business days of receiving an application. Whether the Bank has received an application for the purposes of TRID rules depends on whether six required elements have been completed. The Bank is permitted to send out the Loan Estimate even though all six elements have not been completed, but the risk is that changed circumstances might justify a revised Loan Estimate if they affect certain elements of the application. If the Bank did not require those elements to be completed, it would not be able to revise its Loan Estimate on the basis of changes to them. This might result in the Bank being subjected to additional costs at closing which it will have to pay.

Response Detail

The TILA-RESPA Integrated Disclosure Rule (“TRID”) will be going into effect on August 1, 2015. It covers most closed-end consumer mortgage loans, but not home equity lines of credit, reverse mortgages, or loans secured by mobile homes or by a dwelling that is not attached to real property. The most obvious changes made by the rule are the replacement of the RESPA Good Faith Estimate (“GFE”) and the early TILA disclosure by the “Loan Estimate,” and of the HUD-1 Settlement Statement and the TILA closing statement by the “Closing Disclosure.” There are other changes in the timing or content of disclosures, some of which are related to current rules but which together may require significant changes in the loan procedures of a bank.

The application is important under TRID, because when and whether the Bank is required to provide a Loan Estimate depends on whether it has received an application. The requirement to provide a GFE also depends on whether an application has been received, but the definition of an application has become more stringent under TRID than it is under RESPA.

For the purposes of TRID, an “application” consists of a request for credit which may be given orally or in writing, or both in combination, and consists of six pieces of information:

• Consumer’s name
• Income
• Social Security Number
• Property address
• Estimate of property value
• Mortgage amount sought. 12 CFR §1026.2(a)(3)

An application for the purposes of RESPA contains the same six items, but also “any other information deemed necessary by the loan originator.” This seventh item gave a great deal of discretion to the Bank to determine when it would consider an application complete. Under TRID, a bank no longer has this discretion.

For the purposes of TRID, an application is considered complete when the six pieces of information are received. The Bank must then send or deliver the Loan Estimate to the applicant within three business days.

This does not mean that the application is deemed complete for underwriting purposes. The Bank can still collect any other financial information that it considers necessary for making a credit decision. This would, in turn, set in motion the Regulation B requirement to notify the applicant in a timely manner of the Bank’s credit decision.

What it does mean is that it will be important for the Bank to determine whether or not it has received this information so that it can be assured of providing the Loan Estimate in a timely manner. The Bank should have software or a checklist which will allow it to make this determination. If it is receiving applications electronically, as through its website, it will have to disclose when an application will be deemed received, since the website will be open 24 hours a day, seven days a week, while the Bank would be able to evaluate an application only during its regular business hours, which may be five days a week from 9:00 o’clock a.m. to 5:00 o’clock p.m.

Regulation Z and its commentary are silent with respect to the consequences of providing the Loan Estimate later than the three business day period. Regulation X is similarly silent regarding a late GFE. Both regulations require the creditor to reimburse the consumer for any charges at settlement that exceed the allowed tolerance for those of the estimate. Regulation X also provides that a violation of its GFE provisions is a violation of section 5 of RESPA. No distinction is made between the tolerance provisions or the provision requiring timely disclosure of the GFE. HUD, in a “RESPA Roundup” (April 2011), stated that failure to provide a timely GFE would be treated the same as failing to provide a GFE at all. That is, the creditor would be required to pay all settlement charges. Some regional FDIC offices have made similar rulings. There is a risk that a failure to provide the Loan Estimate in a timely manner may be treated in the same fashion. 12 CFR §1024.7(i); §1026.19(f)(2)(v).

Given the risk to the Bank of failing to provide the Loan Estimate in a timely manner, would it be a good idea for it to send the disclosure out automatically whenever it receives an application, whether the application is complete under TRID or not? There would be no question of waiting to determine whether the Bank had received all six pieces of information and whether the Loan Estimate was sent out in the appropriate timeframe.

While this could save the Bank from a failure to provide the Loan Estimate in a timely manner, it might also leave it at risk for other harm. The Loan Estimate is considered to be in “good faith” if the actual charges do not exceed the estimated charges by more than the allowed tolerance. Unless there is an exception, charges for the following services cannot increase:

The Bank’s or mortgage broker’s charges for their own services
Charges for services provided by an affiliate of the Bank or mortgage broker
Charges for which the Bank or mortgage broker does not permit the consumer to shop

Charges for other services can increase, generally no more than 10 percent, barring an exception. 12 CFR §1026.19(e)(3)(i) and (ii); Official Interpretations, ¶1026.19(e)(3)(ii)-2.

Exceptions allowing the Bank to revise the Loan Estimate would include:

• Changed circumstances related to settlement costs
• Changed circumstances related to customer eligibility
• A change requested by the customer
• Rate lock
• Loan Estimate expiration
• Delayed settlement for construction loans. 12 CFR §1026.19(e)(3)(iv)(A), (B), (C), (D) & (E).

Changed circumstances include information provided at application that was inaccurate or becomes inaccurate. Here is the rub, however:

A creditor is not required to collect all six pieces of information constituting the consumer’s application prior to issuing the Loan Estimate. However, creditors are presumed to have collected this information prior to providing the Loan Estimate and may not later collect it and claim a changed circumstance. For example, if a creditor provides a Loan Estimate prior to receiving the property address from the consumer, the creditor cannot subsequently claim that the receipt of the property address is a changed circumstance. Official Interpretations, ¶1026.19(e)(3)(iv)(A)-3.

Therefore, if the Bank provides a Loan Estimate even though it has not collected all six pieces of information, and one of those missing pieces of information results in its estimate being out of tolerance, the Bank will either have to refund the excess to the customer within 60 days of closing or absorb the cost. 12 CFR §1026.19(f)(2)(v).

The Bank will have to make a risk-based decision as to whether to adopt this procedure, and decide if the risk of not providing a timely Loan Estimate outweighs the risk of paying for costs that exceed the variance/tolerance.

This entry was posted on Monday, June 8th, 2015 at 3:00 pm.