Regulations bringing changes in hard money lending

TRID, the new integrated disclosure rule, favors consumers while creating more work for lenders. The immediate effect may seem prohibitive for hard-money lenders. However, it will benefit them in the long term.

In preparation for new disclosure documents, lenders that make more than five loans annually must provide details on construction and bridge loans. In determining whether a loan is subject to TRID, they must examine the facts of the deal. Generally, the rule will emphasize mortgage loans that the client uses for personal or household purposes. TRID regulations will increase transparency in real estate deals, giving investors and lenders more work to do.

Pre-TRID, hard-money lenders worked solely with a deed of trust and a note. Other requirements put the burden of proof on the borrower. Under TRID, lenders must build trust by allowing clients to see their calculations.

Introduction of Documents

The new regulations require lenders to provide clients with two new forms: the closing disclosure and the loan estimate. The forms must reach the client within a specific timeframe, after which the loan can be finalized only once the client is satisfied with the lender's decisions and process.

The loan estimate must use straightforward language to elaborate on the Good Faith Estimate, explain the TILA disclosure, and list loan features, risks, and related costs.

The closing disclosure form, presented toward the end of the process, summarizes the loan settlement and the TILA statements in simple language, with detailed calculations that show the entire accounting process, including projections. The lender or a settlement agent can prepare the form.

The TRID manual also includes formatting and wording instructions for the documents.

Revised Deadlines

Under TRID, lenders must provide borrowers with the loan estimate form within 3 days of receiving the borrower's details in the loan application. Borrowers must also have the Closing Disclosure documents three days before accepting the loan. Any changes to the loan terms will reset the three-day period.

Post-TRID, lenders should spend a minimum of 14 days before legally closing. This period can extend depending on the lender or borrower. During this period and before closing, the only fees borrowers can pay are the charges for obtaining a credit report.

Preparation Guidelines for Lenders

Lenders operating in the complex money sector must revise their policies and re-examine the systems they use to comply with disclosures. TRID will also affect pre-application estimates, reporting requirements, and compliance tests.

Hard-money lenders must also work harder to prepare clients, which means loan processing will take longer. They may need to hire personnel to meet the regulations. Lenders must also consider the new timelines when preparing contracts to ensure a smooth closing while allowing room for last-minute changes. They must further ask clients to review all documents carefully and explain that the process may take longer.

Long-term Benefits

Experts in the money lending industry believe TRID will increase loan-processing fees by billions. They argue that it will slow down closings, frustrate clients, and send the industry into disarray.

There is some truth to it; money lenders may have to adapt to new timelines and slower closings. However, the bigger picture paints a different reality. Lenders may eventually benefit as much as borrowers. The new regulations will improve borrower-lender relationships, creating opportunities for more business.

Sadly, few outside the industry understand hard money lending, including borrowers. TRID will simplify the lending process and reduce confusing paperwork for clients.