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The CFPB has updated their TRID FAQs a couple of times in 2020 and one area of clarification involved disclosing fees that are “absorbed” versus “offset”. For example, if you’re not going to charge for something, such as a credit report, the fee doesn’t need to be disclosed on the Loan Estimate. It does, however, still need to be on the Closing Disclosure. The rules are a little different; however, when you “offset” costs.
Click on the video to listen to Jerod explain more.
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This webinar was absolutely what I was hoping it would be. I have a couple new employees to the department and this webinar gave some of the basic information they needed to hear. Jerod covered a lot of information in great detail. It was delivered in a manner that our new employees could understand. Thank you! I feel like this is one of the best webinar’s we have attended.
It’s very helpful to have the information presented in terms we can understand.
Have you found the time to keep up with the CFPB’s TRID FAQs?
We know you’ve had a LOT going on this year!
Have you found the time to keep up with the CFPB’s TRID FAQs? The CFPB has updated them a couple of times in 2020, addressing things such as signatures lines, as well as, differences in disclosing costs that are “absorbed” versus “offset”. For example, if you’re not going to charge for something, such as a credit report, the fee doesn’t need to be disclosed on the Loan Estimate. It does, however, still need to be on the Closing Disclosure. The rules are also a little different when you “offset” costs. This is an important distinction that the updated FAQs clarified.
Are you absorbing costs or are you offsetting costs? And the topic is TRID. And the answer to that question is going to be very important for how things get disclosed on your loan estimate and your closing disclosure.
Hi, there. This is Jared Moyer with Bankers Compliance Consulting, and I think most training sessions that I do, especially the live ones, this is a topic that comes up. No cost and partial no-cost loans, as well as, eh, we’re just going to eat this charge or waive this charge. Well, the CFPB, through their frequently asked questions, address this. Now, the regulation addresses it, but not as black and white as the FAQs do. So what we’re going to do is we’re going to look at these costs in two different buckets. We’re going to talk about costs that are offset, and that would be your no-cost and partial no-cost loan products. And the other bucket that we’re going to look at is absorbed costs. In fact, we’re going to start there.
So if your bank is just absorbing the cost, in other words, maybe you don’t charge for credit reports or you negotiate, the borrower won’t have to pay for this fee or that fee, that’s an absorbed cost. And how that’s handled on the loan estimate is you can either disclose it and do a lender credit to offset it, or you can simply leave it off. That’s the interpretation as relates to absorbed costs on the loan estimate. The closing disclosure though, is a different story. When we’re talking about absorbed costs on the closing disclosure, those all have to be listed. You can’t just leave it off the closing disclosure. So you’ll have to list it, and then the fee will actually show up in the ‘paid by others’ column. So that’s how you handle absorbed costs, loan estimate to closing disclosure.
Now, offset costs. Those would be your no-cost and partial no-cost loan products. This is one where we get the biggest amount of pushback on this issue. And these Q and A’s, to me, put the issue to rest. What the Q and A’s state is that if you’re doing no-cost or partial no-cost loans, those fees for that product all have to be transparent and listed on your loan estimate, as well as the closing disclosure. The lender credit also has to be fully listed on your loan estimate, as well as the closing disclosure. Now, the concern from the banking industry is that if I list a credit on my loan estimate, let’s just say that the fees add up to be $3,000 and you’re doing a no-cost product. Well, then the lender credit should be equal to the loan cost for it to be no cost. So if there’s 3000 in fees, the credit should be $3,000.
The fear though is, because of the way the rules are written, when we get to the actual charges on the closing disclosure, let’s pretend they come in at $2,500. So they came in $500 less than what we estimated on the loan estimate. You might be thinking, well, that’s good for my borrower. It’s even better for your borrower because not only do the fees go down from 3,000 to 2,500, they also still get the full $3,000 credit that you originally disclosed on the loan estimate, assuming there was no changed circumstance. I guess it comes with that assumption. In which case, in addition to not having to pay the fees, which went down, they also get an extra $500 because you can’t lower that credit unless it’s related to a legitimate changed circumstance.
So the games that have been played have been where we manipulate the numbers a little bit. And you can’t do that. You got to be fully transparent with the fees, fully transparent with the lender credit, and if it’s no-cost, it should wash to zero on the loan estimate. When you get to the closing disclosure, if those fees go down, that lender credit remains the same. You cannot reduce that. That would be a tolerance violation because the lender credit is a 0% tolerance.
I know this is a heavy issue, but it’s one we cover in detail in a lot of our trainings. If you’re looking for more information, I encourage you to check out our training library; we have a lot of different solutions out there. Or simply pick up the phone and give us a call. We’d love to partner with you and help you out with your TRID compliance needs. Thanks.
TRID’s Five-Year Assessment
If you caught the October issue of Banking on BCC, it pointed out that we’ve been trying to meet the challenges of the TRID Rule for over five years now! This also meant, it was time for the CFPB to assess the rule’s effectiveness and report back on what it found. Those findings were recently released and will, at least in part, help the CFPB determine if any changes are warranted.
While some evidence is “mixed”, findings were generally consistent that the TRID …Rule improved consumers’ abilities to…understand their mortgages. While the CFPB was unable to do a cost-benefit analysis, Director Kraninger acknowledged “sizeable implementation costs”, while stating that ongoing costs are less clear.
Different groups and commenters chimed in on confusion surrounding the different definitions of “business day” that are used within the rule, as well as confusion over the 10% tolerance, liability after foreclosure, the Calculating Cash to Close table, as well as, other concerns.
Be sure to check out our November issue of Banking on BCC for more, including a look at some of the TRID violations noted by the CFPB. Also, if you need TRID training, we have a lot of different webinar options so check out our store.
There’s a couple of different ways construction applications come in. Some of you may simply do construction only. In other words, we’re only going to take requests for credit and process them for the construction financing. We’re going to let some other financial institution do the permanent financing. So, we only take construction loans for the construction phase of the project. We let XYZ Bank down the street, in the next city, in the next town, in the next state, wherever, they do permanent financing. This is our niche, just to do construction. That would be one application for one loan. That’s pretty straightforward.
We go down to the bottom of page letter C, some of you are listing an offer, a little bit of a different production. You do a construction to perm all in one closing. So it’s a construction to perm all in one, one app for one loan. So far, things are pretty consistent whether your letter B, we only do the construction financing, or whether it’s letter C, you do construction and perm, one product, one application, one loan. That’s the takeaway. It’s one app for one loan. It’s a very simple streamlined process.
Many of you listening probably offer a product that goes something like this. You do two phase financing. In other words, I walk in and I say, “I want to build my dream house,” and you process as two different phases. Two different products. I want to be careful with the whole phase/product thing here because some of you who are listening are going, “Well, I do construction to perm all in one. That’s two phases.” Yeah, but it’s one product. One loan. One closing. One application for that one loan, one loan closing, has this built in term where it converts to from construction to permanent financing. One loan, one closing.
Letter D on page number two is different than that what this is, is you have two different loan products: a construction loan product, and when that matures you’re going to convert it or refinance it into a permanent loan product with a new closing and a new maturity date. So, this is where things get a little more complex in the TRID will because they give you some options. What they said is you can turn it into a single app that is for two loans: construction only, followed by permanent financing. Or, you can treat it as two separate applications. Someone who comes and applies for a construction loan, and you do that, and then they apply separately at the same institution for a permanent loan.
There’s three different ways to go about this, I’m going to back up for a moment. We’re going to go to page two, letter D, number one. I wrote next to letter D1, “Path of least resistance.” This is the way I was taught. This is the way when I started working at Bankers Compliance Consulting, and I was able to go out and teach, this is how I taught other bankers. To me, this is the simplest approach. There’s another one, and I’ll come back to it. But when somebody comes into the bank, think about the other side of the desk, the consumer side of this. The consumer walks in and says, “Hey, I want to build my dream home.” “Yeah, we can take care of that. We do that.”
I lay a bunch of stuff down on your desk, and the six items or whatever it is. You’re taking information from me one time for two different loan products. Then you’ll issue me a loan estimate for the construction loan estimate, for the permanent, within three days of getting the sixth item for TRID. There’s no question about what the process is. Somebody wanted to build their dream home. You can help. Here’s the disclosures within the three days of the sixth item for the two different products.
The other alternative option is to have people come in and apply and say, “I want to build my dream home,” and you direct them to the person that takes the construction app. That person only talks construction. They only deal with construction. What you’re going to do is you have a separate process for the permanent financing. When the construction lending person is done, they’ll say, “All right, now you need to go apply for the perm loan. That happens up on the third floor down the street in one of our other offices.” The idea is they wrote this into TRID to allow for procedural flexibility. I still believe the path of least resistance is one app for two loans.
People don’t come in and say, “Oh, I’d like a construction loan. Thank you. I’ll be back in a couple of weeks to talk about permanent financing.” No, people walk in and say, “I want to build my dream home,” and you say, “Yeah, we can help you out. We have two different products. We’ll take your information for both and we’ll process it.” That’s the path of least resistance. I bring that up for this reason, what we want to make sure is that we’re not discouraging people from moving forward with the process. There also can be some issues that crop up if you’re taking two apps for two loans: one for construction, one for permanent. What happens if I sit down and talk construction with somebody and I never move forward with it, and you happen to be HMDA bank?
Now you have to report that construction app because you had no plans for permanent financing, because it never got that far. So, you’ve got to be careful with some of the issues that come up if you take two separate applications as it relates to number two on page number two in your materials.
TRID & Construction Loans
When it comes to TRID, disclosing the “loan product” for a construction loan isn’t always as clear-cut as it seems. Let’s take a construction to perm (all-in-one) loan with one closing. Say the rate for the construction phase is going to be fixed at 4%. You know that the permanent phase will also have a fixed rate but you don’t yet know what it will be at this point. Logic would lead you to believe that the loan product should be disclosed as a fixed-rate transaction but the TRID rules aren’t always logical.
Click on the video to listen to Jerod explain more.
Let’s talk a little shop about TRID and construction loans. Hi there, this is Jerod Moyer with Banker’s Compliance Consulting. Specifically today, what I want to get into is the loan product description as it relates to a construction to perm all in one with a single closing. Now I’m going to give you some specifics about this product that we’re going to discuss. Let’s take, for example, that you’re going to do the construction phase. Let’s just say your rate’s going to be 4% fixed. You also know that the permanent phase is going to have a fixed rate, but it’s going to be a different fixed rate than your construction phase. So both phases are fixed rates. It’s just that you don’t know yet what that permanent phase fixed rate’s going to be. Now logic tell you that this product description should be a fixed rate transaction. However, the TRID rules have some interesting requirements as to how you’re supposed to go about this business.
Even though both phases are going to be fixed, you know what the construction phase is going to be fixed at but because there’s going to be a transition from this fixed rate to that fixed rate, the one that’s not yet known for the permanent phase, that transaction is actually deemed to be, from a TRID standpoint, an adjustable rate transaction. You’ll have to count account for that within the product description and the loan term section within your TRID disclosure. So don’t get tripped up by the fact that it’s fixed, followed by fixed, and the system trying to disclose it as adjustable because it actually has to be done that way.
This is one of the many TRID training elements that we dive into within our training library. Invite you and your team to check out our different training options or, better yet, give us a call. We’d love to figure out how we can partner with you to meet your training needs as it relates to TRID and compliance, or any other compliance requirement for that matter.