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Thursday, August 27, 2015

Down Payment Assistance Programs under TRID

QUESTION
We have a Down Payment Assistance Loan Program for low to moderate income borrowers in the form of a purchase money second mortgage. This second mortgage loan can be in an amount up to 20% of the purchase price. Are loans under this Program exempt from TRID compliance requirements? Also, does the down payment assistance loan need to be included on the Loan Estimate and Closing Disclosure for the first mortgage transaction?

ANSWER
Provided the down payment assistance program meets certain requirements as set forth below, the creditor does not have to provide a Loan Estimate, Closing Disclosure or Special Information Booklet with respect to that loan. [12 CFR 1026.3(h)]

With respect to the primary credit transaction, the down payment assistance should be included in the “Calculating Cash to Close” section on page 2 of the Loan Estimate under “Adjustments and Other Credits”.
Proceeds from subordinate financing or other source. Funds that are provided to the consumer from the proceeds of subordinate financing, local or State housing assistance grants, or other similar sources are included in the amount disclosed under § 1026.37(h)(1)(vii).” [Official Comment 37(h)(1)(vii)- 5]

On the Closing Disclosure, the amount should be included in the “Calculating Cash to Close” section under “Adjustments and Other Credits” and then detailed in Section L “Paid already by or on behalf of Borrower”.
Subordinate financing proceeds. Any financing arrangements or other new loans not otherwise disclosed pursuant to § 1026.38(j)(2)(iii) or (iv) must also be disclosed pursuant to § 1026.38(j)(2)(vi). For example, if the consumer is using a second mortgage or note to finance part of the purchase price, whether from the same creditor, another creditor, or the seller, the principal amount of the loan must be disclosed with a brief explanation. If the net proceeds of a second loan are less than the principal amount of the second loan, the net proceeds may be listed on the same line as the principal amount of the second loan. For an example, see form H–25(C) of appendix H to this part.”  [Official Comment 38(j)(2)(vi)]

In order to qualify for the partial exemption from TRID disclosure requirements, the down payment assistance program must meet the following criteria. [12 CFR 1026.3(h)]

1. The transaction is secured by a subordinate lien;

2. The transaction is for the purpose of: 
(i) Downpayment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies;
(ii) Property rehabilitation assistance;
(iii) Energy efficiency assistance; or
(iv) Foreclosure avoidance or prevention; 
3. The credit contract does not require the payment of interest;

4. The credit contract provides that repayment of the amount of credit extended is:
(i) Forgiven either incrementally or in whole, at a date certain, and subject only to specified ownership and occupancy conditions, such as a requirement that the consumer maintain the property as the consumer’s principal dwelling for five years;
(ii) Deferred for a minimum of 20 years after consummation of the transaction;
(iii) Deferred until sale of the property securing the transaction; or
(iv) Deferred until the property securing the transaction is no longer the principal dwelling of the consumer; 
5. The total of costs payable by the consumer in connection with the transaction at consummation is less than one percent of the amount of credit extended and includes no charges other than:

(i) Fees for recordation of security instruments, deeds, and similar documents;
(ii) A bona fide and reasonable application fee; and
(iii) A bona fide and reasonable fee for housing counseling services; and


6. The creditor complies with all other applicable requirements of this part in connection with the transaction, including without limitation the disclosures required by § 1026.18. 

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group