Here’s for hard money lenders…
TRID regulations are going to have a mixed impact on your investing.
What is the TRID?
The TILA-RESPA Integrated Disclosure Rule, also known as the “Know before You Owe” regulations, are excellent for consumers but, unfortunately, slightly more laborious for you. Hopefully, you are successful enough to transact an enviable amount of loans each year, but new government/ consumer protection regulations stipulate that any hard money lender (or private money lender for that matter) who transacts five or more loans a year will need to include all details of their commercial and residential transactions in their forms. And these accounts have to be as transparent and thorough as possible. In other words, the end result is (or, rather has to be) a real-estate deal that provides clarity of dealing to your client and – at least until you get used to this – far more work for you.
As you likely know, until now private lenders simply required minor documentation such as a Note and a Deed of Trust. Other forms varied but usually included some form of promise from the borrower (usually included in the promissory note); proof of financial statements such as tax returns and proof of income (though no way as intensive as that required by traditional lending institutions); and assurance that the property was worth investor’s while to fund. It was somewhat like a business deal. The proof of evidence lay largely on the borrower; he sought to persuade the lender to invest in his property.
Things have changed…
Since October 1st 2015, all residential real estate transaction requires that the lender outline his shenanigans to the client. If you’re a hard money lender, you may have to mail the client two new forms: the Loan Estimate and the Closing Disclosure (a statement of final loan terms and closing costs). Your client has to receive these forms within a certain time, and you and client can only sign off on loan once the client understands and is satisfied with your calculations of repayment that include interest rates, loan-to-value ratio, and all involved terms and schedules.
Details of the New Documents
The Loan Estimate form uses simple language to summarize the Good Faith Estimate (GFE) and the Truth in Lending Disclosure sections for the client and it explains the loan’s key features, costs and risks.
The Closing Disclosure form summarizes the final Truth-In-Lending statement and the HUD-1 settlement statement, again using language that makes it easy for your client to understand. It provides him with a detailed account of your transaction, including your projected monthly payments, fees, balloon payment, interest rates, and other costs.
You are responsible for preparing the Closing Disclosure (although you may hire a settlement agent to do this if you want, as long as the agent is compliant with the Final Rule’s requirements for the Closing Disclosure). What this form contains is some additional new disclosures that are required by the Dodd-Frank Act as well as a detailed accounting of the settlement transaction.
Timeline for these forms
TRID insists that the client get the Loan Estimate at least three business days after applying for a loan – which means at least three business days after he provided you with personal details such as details of income, Social Security, property address, and amount of required loan. Three days before you and client sign up on loan, your client must receive the Closing Disclosure which provides him with last minute details. This gives him time to look over and consider aspects of the loan – or ask you questions if he has any.
Hard money loans were known for their rapidity. This was one of their attractions. You may be impatient to retain that reputation because much of your business hinges on that. With this new TRID obstruction, experts advise that you practice patience. Prepare yourself for anywhere from a 14-day wait (and likely more) before your loan can legally go to closing. Sometimes you or your client may even want to deli, nullify, or restart the process. Such would be the case if you or client decides to insert significant changes to the loan terms. Examples would be an APR increase of more than 1/8 of a percent for fixed-rate loans, or 1/4 of a percent for adjustable loans; a prepayment penalty, or changes in the loan product. Any of these cause the three-day interim period to start again.
The clause that affects your bottom line.
TRID also insists that the only fee you can impose on your client is a reasonable sum for obtaining a consumer’s credit report, until the client has received and reviewed both forms and agreed to proceed. A small clause, but impacting if you’ve asked for such money in the past.
How can you prepare for these new policies?
Lenders are advised to prepare clients for the changes. Both you and your client may initially experience confusion and delay with documents and procedures (especially since you’re used to and love the ordinarily fast process of private money lending). You may want to consider hiring an assistance to help you. Lenders are told to keep the new timelines in mind when drawing up contracts, to coordinate closings carefully, and to avoid last minute changes. Lenders should also encourage the client to thoroughly review the document and to disclose all concerns. You are advised to explain the situation to the client.
Pros and cons of the TRID
On the one hand, you’re going to have longer timelines and delayed closing dates because of the initial amount of work and the first few weeks’ steeper learning curve needed to master them. But in time, the process will likely become more routine and easier for you.
On the other hand, TRID could benefit you, too. This new loan documentation could lead to stronger relationship with your client. He’ll depend on you to explain the new forms and will trust you more as he sees that your’ upfront about consumer protection guidelines and that you clarify all needed details.
The new TRID regulations are inconvenient and frustrating for hard money lenders. They make you draw out the process thereby making your business more unappealing. They could also ruin your business in that your client may disagree with your reasoning. But TRID could also benefit you since, rightly or wrongly, hard money lending has a certain stigma that intimidates borrowers. For all you know, the TRID may be a blessing in disguise.