“Know Before You Owe” and Consumer Mortgage Protection

Continuing our conversation about the CFPB (Consumer Financial Protection Bureau) we now want to introduce TILA (Truth In Lending Act). Again, our focus here is mainly how it relates to mortgage loans. Just like its almost twin RESPA – they rarely go anywhere without each other – this law also had significant updates during the aftermath of the RMBS crisis. It is often referred to as “Regulation Z.”

The Truth In Lending Act was intended to simplify how credit terms are disclosed to a consumer so that they can compare different credit terms to each other. As noted before, TILA and RESPA tend to go hand-in-hand. However, as noted in our previous blog post, the HUD-1 has now been replaced by what is called TRID or the TILA-RESPA Integrated Disclosure, which has two forms: 1) the Loan Estimate and 2) the Closing Disclosure. Let’s talk about these two forms.

Loan Estimate: One of the first steps for this disclosure was for it to be in an easy to read format with more plain language. This form was created to clearly set forth the terms of the transaction which will help the borrower determine whether they would like to proceed with the transaction. You should receive this form with three business days after applying for a mortgage.

Closing Disclosure: At least three business days prior to closing on a home purchase or refinance, consumers will be given their Closing Disclosure form. Why? Sometimes there are costs or fees that the borrower didn’t completely understand so if they have questions, their mortgage broker/loan originator can provide them with the additional information.

There has been a lot of misinformation on the 3-day rule when it first came out. A lot of people were concerned that if changes were made, it would affect the closing date of the home. Only in specific situations noted below would a change require a new three-day review period.

  1. Increasing the annual percentage rate (APR) by more than 1/8 of a percentage point for a fixed-rate loan or 1/4 of a percentage point for an adjustable-rate loan (decreasing the interest rate or fees doesn’t cause a delay)
  2. The addition of a pre-payment penalty
  3. A change in the loan product, e. from a fixed-rate to an adjustable-rate loan.

The three days are important in case there are major changes. This way a consumer isn’t sitting at a closing table surprised with new information and feeling pressured into signing to get into their home, instead of getting the answers one needs to make a good decision.

This is why this has become known to the industry as the “Know Before You Owe” rule.