There’s been a lot of hullaballoo over these recent regulatory changes and while they’re being covered in nearly every real estate related publication, the details are still murky for investors. It will likely take a solid few months for the dust to settle but in the meantime, the team here at GoldenKey didn’t want to leave you hanging.
TILA-RESPA becomes TRID
The TILA-RESPA changes that occurred on October 3, 2015 are the result of amendments by the Consumer Financial Protection Bureau to the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) to provide more transparency to borrowers. This new rule (called TRID for TILA-RESPA Integrated Disclosure Act) consolidates what were previously the Good Faith Estimate and the Truth in Lending Disclosure into the Loan Estimate, and the final Truth-in-Lending statement and the HUD-1 settlement statement into the Closing Disclosure. These new rules apply over the majority of loans, though there are some exceptions, which will be discussed a little farther along in this article.
The Loan Estimate must be provided to the borrower within three business days of the loan application. It is intended to be better organized now that the information has been consolidated into a format that makes it easier for the consumer to read. The intent of having all the necessary information on one document instead of two is to enable the borrower to have a clearer idea of what they are being charged so they are more empowered to shop around for the best rates.
The Closing Disclosure (formerly the HUD-1) has to be provided to the borrower three business days before closing. This is a strict timeline and cannot be waived except in cases of financial emergency (‘emergency’ is up for interpretation but includes situations such as foreclosure, etc.) Whereas before it was common practice to be making changes to the HUD up until closing, that is no longer possible. Any change made that increases the annual percentage rate (not the interest rate) of the loan by 1/8th of a percentage point (0.125) or more will trigger the 3 day review process.
In addition to this, the heightened security of real estate attorney offices means that attorney closing fees have increased; in some cases, they have almost doubled.
The underwriting process will take longer
The lender is now responsible for the preparation of the Closing Disclosure (previously, it was the closing attorney that prepared this document). Due to these new responsibilities, loans are likely to take longer to underwrite, as lenders are going to be more careful these first few months of the new act.
Investors who intend to obtain a loan for a new purchase definitely need to keep this in mind, as it will affect the time that it takes to close on a property. Many lenders are recommending at least 45 days, though it wouldn’t hurt to err on the side of caution and give them 50-60. Most investors we know aren’t the ‘sit-around-and-wait’ type, but in this case, a little patience will go a long way. Once lenders get used to the new process, it’s completely possible that delays will again become few and far between ;) But until then, it’s best to be prepared for the worst.
Investors, your business structure may matter
There are a few exceptions when it comes to the new TRID rules that are important to keep in mind. These include cash transactions, seller financing (as long the seller has limited financing activities to 5 properties or less), home equity lines of credit, land, and so-called “commercial” or business transactions. Again, these types of credit and/or purchases do not require the new forms and do not follow these new TRID rules. Whether or not the lender will be penalized if they do end up using the new forms is yet to be determined. It’s entirely possible that while these kinks are still being worked out, there will be crossover between the old and new forms, especially when it comes to transactions that are exempt.
However, since the rules are so new, there is also much left to interpretation. Case in point: business transactions. It is still uncertain whether personal investment properties purchased by individual investors qualify as exemptions under this rule. Based on the guide from the Consumer Financial Protection Bureau, business transactions are grouped with “agricultural, commercial, and organizational credit” - leading one to believe that “personal” investment transactions are still subject to the TRID forms and rules. The differentiation between commercial use and personal investment use seems to be the establishment of a business entity.
Ultimately, the final interpretation is up to your lender and your individual situation should be discussed with them.
Wholesalers, be careful with the double close
Within the wholesaling strategy, there are multiple ways that the wholesaler passes on possession of the property to the end buyer. In some cases, this is via assignment of an option contract; in others, the wholesaler schedules back-to-back closings, often for the same day. Whereas that was pretty normal before, double closings will now be fraught with extreme risk.
The best course of action would be to work holding costs into your final numbers regardless of whether you will assign the contract, double close, or actually intend to hold it for a period of time. In the case of a double close, this is to give you a buffer in case a last minute change trips the 3 day review process again and prevents you from going through with one or both of the closings on the same day. It’s better to be safe than sorry.
How does this affect GoldenKey & the buyer’s rebate?
Never fear, you will still get your rebate (subject to lender approval, of course). That part hasn’t changed; buyer rebates are legal in 40 out of the 50 states, and the Department of Justice continues to work toward bringing that rebate to all 50 states.
Each lender will have their own set of requirements when it comes to the buyer rebate. In most cases, the rebate will need to be reflected on the Closing Disclosure as a credit to the buyer. The lender will want to make sure the buyer is not receiving a gift - all money that changes hand typically has to be reflected on this disclosure form.
What is likely to change, however, is the length of time it takes to underwrite a loan. In order to not delay the loan process, the rebate should be presented to the lender as soon as possible. This is something a GoldenKey closing agent will also be aware of, of course.
Beyond potential delays, there isn’t much about the new TRID rules that affects the way GoldenKey operates. These changes are more for better disclosure to home buyers. So you can rest easy knowing the rebate is still okay and not going anywhere!