Although TRID rules have been around for a while now, there still seems to be some confusion when it comes to understanding the TRID loan purpose that should be listed on the Loan Estimate (LE). Much of the reason behind this confusion is that the rules actually contradict the loan purpose rules of Regulation C and the Home Mortgage Disclosure Act (HMDA). Therefore, it is important for each creditor to fully understand the TRID loan purpose hierarchy and when each TRID loan purpose should be listed on the Loan Estimate.
One of the biggest challenges in understanding TRID loan purposes is to realize there is a difference in purpose definitions under TRID and HMDA. As TRID and HMDA have different purpose options and different purpose definitions, the same loan may have one purpose under HMDA but that same loan would have a completely different purpose under Regulation Z (and TRID). The reason for this difference is that the definitions of purposes (i.e. purchase, refinance, ect.) are defined differently under each rule. To explain, let’s take a quick look at the purpose options under both HMDA and TRID.
HMDA provides for four different purchase options: 1) purchase, 2) refinance or cash-out refinance, 3) home improvement, or 4) other. (As this article is focused on the TRID loan purpose hierarchy, we are not going to get into details about the HMDA purpose hierarchy. For more information on HMDA purposes and the HMDA purpose hierarchy, read this article.)
On the other hand, TRID provides for four slightly different purpose options: 1) purchase, 2) refinance, 3) construction, and 4) home equity loan.
Regulation Z defines the four purpose options under TRID and the commentary provides examples of each purpose. In simple terms, each TRID loan purpose can be defined as follows:
Purchase Loan Purpose. A purchase is defined as credit to finance the acquisition of the property that secures or will secure the transaction. Since bare land loans are subject to TRID, this means that a purchase loan will often include either a purchase of bare land or the purchase of a dwelling.
Refinance Loan Purpose. A refinance is defined as credit that will be used to refinance an existing obligation that is secured by the property that secures or will secure the transaction. A refinancing is a new transaction requiring new disclosures to the consumer and occurs when an existing obligation that was subject to Regulation Z is satisfied and replaced by a new obligation undertaken by the same consumer.
Construction Loan Purpose. A construction purposes is one where the credit will be used to finance the initial construction of a dwelling (not renovations to an existing dwelling) on a property that secures or will secure the loan. As we will explain when we discuss the TRID Loan Purpose Hierarchy, a construction loan purpose will only be used when an applicant already owns the land they are building on and they are not refinancing that land with the construction loan.
Home Equity Loan Purpose. A home equity loan is a credit that is not a purchase, refinance, or construction loan. These loans are often debt consolidation loans, second mortgages (new money), or other loans where an applicant owns a home free and clear.
In some instances, a loan will actually have multiple purposes, making it more challenging to know which purpose should be listed on the Loan Estimate. To explain this, it is important to understand that the TRID purposes have a “waterfall” - or hierarchy - that determines which purpose should be listed on the Loan Estimate when multiple purposes are present.
The TRID loan purpose waterfall (hierarchy) is as follows: One, purchase; two, refinance; three, construction; and four, home equity loan. When determining which purpose to disclose, a creditor must look at the waterfall of four possible purposes in the order that they appear in Section 1026.37(a)(9) of Regulation Z and select the first one that applies to the loan.
The same loan purpose waterfall applies to construction loans. In fact, the CFPB provided an illustration of the TRID loan purpose waterfall in their March 2016 webinar that discussed construction loans under TRID:
“To illustrate use of the waterfall, if the loan meets the definition of purchase because the consumer intends to use the credit to purchase the property that will secure the loan, the creditor must disclose the purpose as purchase even if the loan also meets any other definitions appearing later in the waterfall. A creditor must disclose the purpose as refinance if the consumer intends to use the credit to construct a dwelling on real property that the consumer already owns and to satisfy an existing loan secured by that real property. If the credit will be used to finance the initial construction of a dwelling on the property and will not be used for any purchase or refinance purpose, the creditor must disclose the purpose as construction. Even if the loan is secured by real property being purchased and disclosed as a purchase on the Loan Estimate, if the loan is also financing the construction of a dwelling, the provisions of Section 1026.17(c)(6)(ii) still apply. So the loan's purpose as disclosed on the Loan Estimate does not impact the applicability of other construction-specific provisions of Regulation Z.”
You can learn more about the TRID loan purpose for construction loans here.
The actual regulation provides each loan purpose as follow:
“(9) Purpose. The consumer's intended use for the credit, labeled “Purpose,” using one of the following terms:
(i) Purchase. If the credit is to finance the acquisition of the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a “Purchase.”
(ii) Refinance. If the credit is not for the purpose described in paragraph (a)(9)(i) of this section, and if the credit will be used to refinance an existing obligation, as defined in § 1026.20(a) (but without regard to whether the creditor is the original creditor or a holder or servicer of the original obligation), that is secured by the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a “Refinance.”
(iii) Construction. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) or (ii) of this section and the credit will be used to finance the initial construction of a dwelling on the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for “Construction.”
(iv) Home equity loan. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) through (iii) of this section, the creditor shall disclose that the loan is a “Home Equity Loan.”
In addition to the regulation, the commentary provides some additional information about the TRID loan purpose:
“1. General. Section 1026.37(a)(9) requires disclosure of the consumer's intended use of the credit. In ascertaining the consumer's intended use, § 1026.37(a)(9) requires the creditor to consider all relevant information known to the creditor at the time of the disclosure. If the purpose is not known, the creditor may rely on the consumer's stated purpose. The following examples illustrate when each of the permissible purposes should be disclosed:
i. Purchase. The consumer intends to use the proceeds from the transaction to purchase the property that will secure the extension of credit. In a purchase transaction with simultaneous subordinate financing, the simultaneous subordinate loan is also disclosed with the purpose “Purchase.”
ii. Refinance. The consumer refinances an existing obligation already secured by the consumer's dwelling to change the rate, term, or other loan features and may or may not receive cash from the transaction. For example, in a refinance with no cash provided, the new amount financed does not exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing. Conversely, in a refinance with cash provided, the consumer refinances an existing mortgage obligation and receives money from the transaction that is in addition to the funds used to pay the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing. In such a transaction, the consumer may, for example, use the newly-extended credit to pay off the balance of the existing mortgage and other consumer debt, such as a credit card balance.
iii. Construction. Section 1026.37(a)(9)(iii) requires the creditor to disclose that the loan is for construction in transactions where the creditor extends credit to finance only the cost of initial construction (construction-only loan), not renovations to existing dwellings, and in transactions where a multiple advance loan may be permanently financed by the same creditor (construction-permanent loan). In a construction-only loan, the borrower may be required to make interest-only payments during the loan term with the balance commonly due at the end of the construction project. For additional guidance on disclosing construction-permanent loans, see § 1026.17(c)(6)(ii), comments 17(c)(6)-2, -3, and -5, and appendix D to this part.
iv. Home equity loan. The creditor is required to disclose that the credit is for a “home equity loan” if the creditor intends to extend credit for any purpose other than a purchase, refinancing, or construction. This disclosure applies whether the loan is secured by a first or subordinate lien.
2. Refinance coverage. The disclosure requirements under § 1026.37(a)(9)(ii) apply to credit transactions that meet the definition of a refinancing under § 1026.20(a) but without regard to whether they are made by a creditor, holder, or servicer of the existing obligation. Section 1026.20(a) applies only to refinancings undertaken by the original creditor or a holder or servicer of the original debt. See comment 20(a)-5.”
- The consumer's name, income, and Social Security number.
- The property address.
- An estimate of the value of the property.
- The mortgage loan amount sought.
TRID Purpose. TRID, or TILA-RESPA Information Disclosure, informs consumers applying for a mortgage and defines compliance rules for lenders. It's a consolidation of TILA (Truth in Lending) and RESPA (Real Estate Settlement Procedures Act) disclosures.What are the 6 Trid requirements? ›
- Social Security Number.
- Property Address.
- Estimated Value of Property.
- Mortgage Loan Amount sought.
What are the two major features of the TRID Rule? The two major benefits of the TRID Rule are combining several forms and additional statutory disclosure requirements into two forms, which will reduce paperwork and consumer confusion.What are the Trid guidelines for 3 days? ›
The three-day period is meas- ured by days, not hours. Thus, disclosures must be delivered three days before closing, and not 72 hours prior to closing. Disclosures may also be deliv- ered electronically on the disclo- sures due date in compliance with E-Sign requirements.What does compliance mean in mortgage loan? ›
Mitigating loss of revenues: Mortgage compliance is a precautionary measure that protects lenders from fraud and other loss-making scenarios. For example, due to the lack of regular reviews, a California homebuyer would postpone foreclosure for 13 years, tying the property up in a complex dispute.What does Trid compliant mean? ›
"TRID" is an acronym that some people use to refer to the TILA RESPA Integrated Disclosure rule. This rule is also known as the Know Before You Owe mortgage disclosure rule and is part of our Know Before You Owe mortgage initiative. Learn more about Know Before You Owe.What is the purpose of the new Trid rule quizlet? ›
[CORRECT] Explain: The new TRID Rule was issued to simplify and improve disclosure forms for mortgage transactions.What is the Trid loan estimate rule? ›
Under the TRID rule, lenders are held to a good faith standard in disclosing fees and charges on the loan estimate. This good faith standard is measured by comparing what is disclosed on the loan estimate with what the consumer actually pays at consummation.What are the 5 elements of RESPA? ›
The topics covered include: (1) the receipt of an application, (2) whether new disclosures will be required for assumptions, (3) record retention, (4) the tolerance applicable to owner's title insurance, and (5) the timing for the initial and revised Loan Estimates.
- Your name.
- Your income.
- Your Social Security number (so the lender can check your credit)
- The address of the home you plan to purchase or refinance.
- An estimate of the home's value.
- The loan amount you want to borrow.
The three-day period is measured by days, not hours. Thus, disclosure must be delivered three days before closing, and not 72 hours prior to closing. Disclosures may also be delivered electronically to the Delivery Period and may be signed in compliance with E-Sign requirements.What are the two most important disclosures that are required under the Truth in Lending Act? ›
Required Written Disclosures
Annual percentage rate (APR): The yearly percentage rate that applies to the cost of credit. Finance charges: The total amount of interest and fees that you'll pay over the life of a loan in dollars.
What Information Do TILA Disclosure Statements Provide? known as the annual percentage rate, or APR. the life of loan with on-time payments. provided to the borrower, which is normally the amount borrowed.What is the 3 day rule for TILA RESPA? ›
The general rule is that the creditor must deliver or place in the mail the revised Loan Estimate to the consumer no later than three business days after receiving the information sufficient to establish that one of the reasons for the revision described above has occurred.Can you waive the 3 day Trid rule? ›
The consumer may, after receiving the disclosures required by this paragraph (c)(1), modify or waive the three-day waiting period between delivery of those disclosures and consummation or account opening if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency.What are the exceptions to the closing disclosure 3 day rule? ›
Exceptions to the Rule
Consumers may waive their right to receive the Closing Disclosure three days prior to consummation only if they have a bona fide personal financial emergency. Bona fide personal financial emergencies are extremely rare and determining whether one exists is fact intensive.
Compliance levels indicate the degree of compliance that your organization has achieved for a program or a requirement. For example, you could define levels of 0-Lowest, 1- Very Low, 2-Low, 3-Medium Low, and so on.What is considered compliance? ›
Compliance means that a company adheres to the applicable rules and laws. This includes both country specific laws and requirements from the regulatory authorities as well as internal company directives. A range of tools and process can be implemented and used by a company to bring about good compliance.What does complete compliance mean? ›
Full compliance means compliance with all material requirements of each standard except for de minimis violations, or discrete and temporary violations during otherwise sustained periods of compliance.
The Loan Estimate and Closing Disclosure replaced four documents that lenders used to provide: the Truth-in-Lending (TIL) statement, the Good Faith Estimate (GFE), the Truth-in-Lending disclosure and the HUD-1 statement.Who is exempt from Trid? ›
A. TRID does not apply to loans made by a person or entity that makes five or fewer mortgages in a calendar year and thus is not a creditor (§12 CFR 1026.2(a)(17)). If the seller makes more than five loans in a calendar year, the rule may apply to the seller as a creditor.What are the penalties for Trid compliance? ›
First tier violations, which apply to any TRID violation, incur fines of up to $5,000 per day. Second tier violations are those which are found to be caused by lack of due care or recklessness on the part of the processor, carry fines of up to $25,000 a day.Which of the following transactions is not governed by the new trid rules? ›
The rule does NOT apply to Home Equity Line of Credit transactions reverse mortgages mortgages secured by a mobile home or other dwelling that is not attached to real property. Also, TRID rules do NOT apply to loans made by a person or business that makes 5 or fewer mortgages in a calendar year.Which of the following disclosures are no longer required as per trid? ›
The TRID Rule does not require disclosure of a closing cost and a related lender credit on the Loan Estimate if the creditor incurs a cost, but will not charge the consumer for that cost (i.e., the creditor will “absorb” the cost).How many components does an application for transaction subject to the Trid rule have by definition? ›
A loan application consists of six pieces of information from the consumer: (i) name, (ii) income, (iii) social security number, (iv) property address, (v) estimated value of property, and (vi) amount of mortgage loan sought.What happens if a loan estimate is not sent within the 3 days? ›
If the Loan Estimate is not timely when sent/provided, the lender is in violation of the law. Technically without a timely Loan Estimate the lender may not charge the consumer any fees.What are the 6 RESPA triggers? ›
The six items are the consumer's name, income and social security number (to obtain a credit report), the property's address, an estimate of property's value and the loan amount sought.What are the 5 essential elements of a real estate contract name and define? ›
Required Elements of a Real Estate Contract
To establish legality, a real estate contract must include a legal purpose, legally competent parties, agreement by offer and acceptance, consideration, and consent.
As is the case under current law, the TRID rule identifies three categories of tolerance thresholds: zero tolerance, 10 percent cumulative tolerance and no or unlimited tolerance.
Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.What are the 5 C's in a loan application? ›
Lenders score your loan application by these 5 Cs—Capacity, Capital, Collateral, Conditions and Character. Learn what they are so you can improve your eligibility when you present yourself to lenders.What are the 3 C's for applying a loan? ›
Character, Capacity and Capital.What document does Trid require the buyer receive three days before closing the loan? ›
Your lender is required by law to give you the standardized Closing Disclosure at least 3 business days before closing. This is what is known as the Closing Disclosure 3-day rule.What are Trid disclosure rules? ›
TRID rules are also informally referred to as “Know Before You Owe” rules. This is because they address information on mortgages, credit and fees that consumers should read and understand before they make an offer on a house and consent to monthly loan payments.What is the Trid 7 day rule? ›
Under the TRID rule, the creditor must deliver or place in the mail the initial Loan Estimate at least seven business days before consummation, and the consumer must receive the initial Closing Disclosure at least three business days before consummation.What is the Trid 7 day closing rule? ›
The 7 Day Waiting Period: Use the precise definition of Business Day here. Consummation may occur on or after the seventh business day after the delivery or mailing of the initial Loan Estimate.What is the Trid rule Dodd Frank Act? ›
The TRID Rule implemented the Dodd-Frank Act's directive to combine certain mortgage disclosures that consumers receive under TILA and RESPA and requires that all creditors use standardized forms for most transactions.What are the 4 main disclosures required under TILA? ›
TILA disclosures include the number of payments, the monthly payment, late fees, whether a borrower can prepay the loan without penalty and other important terms. TILA disclosures is often provided as part of the loan contract, so the borrower may be given the entire contract for review when the TILA is requested.What are Trid timing requirements? ›
A creditor must ensure that a consumer receives an initial Closing Disclosure no later than three business days before consummation. 12 CFR § 1026.19(f)(1)(ii)(A).
TRID does not apply to loans made by a person or entity that makes five or fewer mortgages in a calendar year and thus is not a creditor (§12 CFR 1026.2(a)(17)). If the seller makes more than five loans in a calendar year, the rule may apply to the seller as a creditor.Does Saturday count as a Trid day? ›
The three-day rule applies to business days, including Saturdays. But Sundays and Nationally recognized holidays do not count. This means you may technically have more than three days before closing to review the document.What is the 3 day waiting period after closing? ›
Why Am I Required to Wait Three Days After I Receive the Closing Disclosure? The purpose of the three day waiting period after you receive the Closing Disclosure is to provide sufficient time for you to review the document and to identify and address any issues you find.How many days prior to closing must a loan estimate be signed? ›
Consumers must receive the Closing Disclosure no later than three business days before consummation of their loan. The forms use clear language and design to make it easier for consumers to locate key information, such as interest rate, monthly payments, and costs to close the loan.