When does APR become "inaccurate" under TRID?
We're here today to debunk two myths that have arisen with the TRID rule- not without some help from the CFPB. We know the last thing you want now is confusion, so we're here in an attempt at clarity.
There has been some bad information passed around about a couple of issues related to when an APR becomes "inaccurate" for purposes of re-starting the 3-day TRID clock (and thereby pushing closing out that much further).
A good example of where to find this misinformation can be found here - in a document created by the CFPB and still posted on their website. As we see below, unless they decide to change the Rule, two pieces of information provided in this CFPB handout are simply incorrect.
General Rule: Restart Clock When APR is "Inaccurate"
As you know, a big change in the TRID rule has been that a new 3-day waiting period is only triggered in certain circumstances (instead of whenever anything at all changed, as the rule was originally written).
One of these circumstances is when the APR becomes "inaccurate." This refers to when the Closing Disclosure is delivered, and thereafter (prior to closing) it becomes inaccurate. (Remember, if no 3-day waiting period is required, all you have to do is find a way to deliver the revised CD to the borrower prior to closing.)
Here's how the regulations define "inaccurate": (from 12 CFR 1026.22)
As a general rule, the annual percentage rate shall be considered accurate if it is not more than 1/8 of 1 percentage point above or below the annual percentage rate [previously given]....
In an irregular transaction, the annual percentage rate shall be considered accurate if it is not more than 1/4 of 1 percentage point above or below ...
For [these purposes], an irregular transaction is one that includes one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment.
1/8 For ALL Transactions! (Not 1/4 for ARMs)
The first myth to debunk is this: The APR on an adjustable rate mortgage can vary by 1/4 or less without triggering a new 3-day waiting period.
That is wrong.
The 1/8 requirement applies to all loans, except "irregular" loans. But a simple ARM is simply not an "irregular" transaction.
The official interpretations to 1026.22 clearly describe "irregular" as follows:
Irregular transactions. The annual percentage rate for an irregular transaction is considered accurate if it varies in either direction by not more than ¼ of 1 percentage point from the actual annual percentage rate. This tolerance is intended for more complex transactions that do not call for a single advance and a regular series of equal payments at equal intervals. The ¼ of 1 percentage point tolerance may be used, for example, in a construction loan where advances are made as construction progresses, or in a transaction where payments vary to reflect the consumer's seasonal income. It may also be used in transactions with graduated-payment schedules where the contract commits the consumer to several series of payments in different amounts.
It does not apply, however, to loans with variable-rate features where the initial disclosures are based on a regular amortization schedule over the life of the loan, even though payments may later change because of the variable-rate feature
And That's Up or Down!
Another myth to debunk is this: "APR is only 'inaccurate' where it increases by 1/8. We don't need a new 3-day waiting period if it goes down."
This is also wrong.
As you'll see above, the rule itself expressly says "not more than 1/8 of 1 percentage point above or below ...." And the official interpretations to 1026.22 reinforce this by saying - The APR is "considered accurate where it varies in either direction by not more than 1/8 of 1 percentage point from ..."
So the rule makes very clear that the 3-day waiting period is required where the APR goes up or down.
Example
Struggling to pair this with reality? That's probably my fault. Here's an example:
You intend to close on an ARM on Thursday. On Monday, the borrower receives the Closing Disclosure. On Tuesday, the borrower asks for a change to the closing terms (think of an example - loan amount, seller credit, etc.). No matter what, you must issue a revised Closing Disclosure. But assuming we can do that in time, can we still close on Thursday - or do we have to wait another 3-day waiting period? And simply put - if the change you've made increases or decreases the APR by 1/8, the answer is yes.
In other news:
A Harvard Kennedy School study shows that non-depository mortgage lenders have increased market share from 27% in 2012 to 48% in 2014. The study also shows that non-depositories are more active in servicing (thanks, Basel 3!) and recommends against continuing to implement "bank-like" regulatory standards because, among other reasons, it would "stunt innovation"
So you heard that the CFPB posted around 8,000 consumer complaint narratives online for anyone to see (of course, that number is always growing). If you only click on one link in these newsletters ever, this is one to do - the narratives are eye-opening. Search your company and competition!
The U.S. Supreme Court has upheld the controversial Disparate Impact theory for fair lending violations ... here's a link to a webinar to take place today (July 1) at 12:00 (supposed to have registered 2 days in advance, but I bet you could still get in)
Not that I'm flattery operated or anything, but it did seem a little excessive when a TRID meeting last week collapsed into the room bombarding me with lawyer insults ... you know, the one about how copper wire was invented by two lawyers arguing over a penny, the one about how 90% of lawyers give the rest a bad name. Give it a break already!
Don't think you're good enough? Not sure that you deserve your job title, your paycheck? That might not be a bad thing. Sometimes it's easy to see who among a group of test-takers did well. The guy running out 20 minutes early, thinking he aced the test? He failed. The guy sweating it out to the end, thinking he failed? Top of the class. He was harder on himself, looked deeper to analyze issues that others didn't notice (boosting their confidence, but lowering their score). This may be an example of the Imposter Syndrome- wherein many highly successful people feel like impostors - driving them to work that much harder to make up for a feeling of inadequacy. I guess the lesson there is if you have someone like that working for you, don't overlook them - don't assume their performance is poor because they're hard on themselves.
There is a flip-side to this coin, one that is less profound but a little more amusing. And that has to do with the young man who failed his test. There are people who believe in the Dunning-Kruger Effect - the idea that some people are too incompetent to realize that they are so. In fact, a couple of researchers published a pretty famous paper called "Unskilled and Unaware of It" - which was inspired by a bank robber who thought rubbing lemon juice on his face would make him invisible on security cameras.
"For example, a planner may find that his beautiful plans fail because he does not follow through on them. Like so many brilliant people, he believes that ideas move mountains. But bulldozers move mountains; ideas show where the bulldozers should go to work. This planner will have to learn that the
work does not stop when the plan is completed."
- Peter F. Drucker
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**These are our opinions. We're not authorized, or willing, to express those of others.**