Page 12 - 2Q 2018 June Reporter

TRID and “Gifts of
Equity”— Still No Answers
By James McGuire, Associate General Counsel
James McGuire
In August of 2017, the Consumer Financial
Protection Bureau (CFPB) finalized their changes to
the TILA/RESPA Integrated Disclosures Rule (TRID).
After what many called a disaster of an initial launch,
these changes finally addressed lingering questions
about the rule, especially in the areas of construction
lending and simultaneous second lien purchase loans.
Unfortunately, the changes still failed to address other
continuing concerns, among them how to disclose
“gifts of equity” on the Loan Estimate and Closing
Disclosure.
“Gifts of equity” are essentially a discount on the
sale price of the property below market value. The
seller agrees to sell the property to the buyer for X
number of dollars below what the property would go
for on the open market; the X dollar figure is then
considered a “gift of equity.” These “gifts” aren’t an
issue with portfolio loans with a loan-to-value ratio
(LTV) on the property below 80%—using the actual
lower sales price as the value. The issues appear
when the loan amount exceeds 80% of the actual
sales price or in the case of investment loans— the
issue being documentation as investors tend to
require gifts of equity to be clearly disclosed on closing
documents, or how a “gift of equity” must be factored
into the actual sales price of the property for LTV
purposes.
So if you’re required to disclose a “gift of equity”
somehow on the TRID forms, what to do? There
are a few different schools of thought on this, and
while there are slight variations for each, three basic
approaches have been suggested. For the first
approach (Approach #1), some believe this amount
should be disclosed as “Downpayment/Funds from
Borrower” and then offset with a negative amount in
“Adjustments and Other Credits” in the Calculating
Cash to Close table. (In Section L of the Closing
Disclosure, the gift could appear in Other Credits, with
a note that the fee is “P.O.C.” and paid by the Seller).
9
June 2018
For the second approach (Approach #2), others feel
you should put the amount in Seller Credits, offsetting
that with a positive number in Adjustments and Other
Credits and a figure in Section K under “Adjustments”.
For both Approach #1 and Approach #2, the “gift
of equity” would be disclosed in Section N, too,
effectively reducing the amount of money remitted
to the seller at closing. Finally, for the third approach
(Approach #3), still others feel like the best thing
to do is simply to reduce the overall “Sales Price of
Property” down to what the property actually is selling
for (market price minus the “gift of equity”), and then
mention the “gift of equity” amount in an addendum
to the Closing Disclosure (leaving it off the Loan
Estimate entirely).
Each of these three approaches carries certain
negatives. The first approach, for instance, seems
somewhat to mimic the process for disclosing gifts
from family members prior to closing. But as the
commentary to the regulation states, “Amounts
expected to be paid at closing by third parties not
otherwise associated with the transaction, such as
gifts from family members . . . are included in the
amount disclosed under [Adjustments and Other
Credits].” It is clear that this approach is intended
only for gifts from third parties, and not from parties
involved in the transaction itself, which the seller
would be. Secondly, this approach appears intended
more for funds delivered at the closing table, as
opposed to any gift delivered prior to or after closing
as is arguably the case with a “gift of equity.” While
the math may add up with this approach, it requires
a stretch beyond the black-and-white regulatory
language, and doesn’t quite seem to sync up with
what the CFPB had in mind when disclosing ‘gifts’ on
the Closing Disclosure.
Regarding the second approach, while more
straightforward than Approach # 1, it too requires a
bit of fiction, as a “gift of equity” from the seller is not
IllInoIs RepoRteR