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Lending

Complying with TILA-RESPA tolerances, Part 1

Breaking down the remainder of the Loan Estimate limits

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This article is part of HW PartnerDirect™. What is this?

CFPB RESPA/TILA Rule Reference: 7.6-7.9, pages 36-38, CFPB Detailed summary of the rule 

So we’ve beat you over the head with TILA-RESPA good-faith requirements and tolerances, but wait, there’s more! This post is one of two that wrap up Section 7 of the CFPB’s detailed summary of the rule TILA-RESPA rule. And while some of it will sound like a repeat of information in past posts, we’ll continue doing our best to highlight details as each sub-section of the rule tends to overlap a bit at first glance.

To start with, we know there are certain closing charges not included in the zero-tolerance category and are generally permitted to increase (which includes the aggregate amount of charges for third-party services). However, there are several cases where the sum of estimated charges needs to be adjusted. Additionally, we need to keep in mind that the 10% tolerance is mainly against the sum of estimated charges, rather than the individual service charges.

The closing charges that are not included in the zero-tolerance category are considered to be in “good faith” if they do not increase at all or if the following are true:

1.     The sum of charges for third-party services and recording fees ultimately paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed on the Loan Estimate by more than 10%;

2.     The charge for the third-party service is not paid to the creditor (or an affiliate of the creditor);

3.     The creditor permits the consumer to shop for these third-party services.

Keep in mind that differences between the estimated amounts of such charges, and the amounts of such charges paid by or imposed on the consumer, do not constitute a lack of good faith as long as the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided.

Take and moment and think about:

How do you plan to prove this to the CFPB when they come knocking on your door due to a customer complaint?

Is your audit trail across your organization and business partners robust enough to provide that information without disruption to operations?

What would you do if that complaint gets posted to their website with your company’s name attached to it, while the consumer remains anonymous? 

Next, is something most of us know by now – when the creditor allows a consumer to shop for a third-party service and offers a written list of service providers. If the consumer chooses a provider that is not identified on the creditor’s list, then the creditor is not limited in the amount that may be charged for the service, and the charge is not subject to a tolerance.

When this occurs for a service that otherwise would be included in the 10% cumulative tolerance category, the sum of estimated charges needs to be adjusted and the respective charge is removed from consideration for purposes of determining the 10% tolerance level.

However, the rule remains when the consumer does not select a service provider or selects a provider from the creditor’s list.

For example, if the creditor permits the consumer to shop for a required settlement service but the consumer either does not select a settlement service provider or chooses a settlement service provider identified by the creditor on the written list of providers, then the amount charged is included in the sum of all such third-party charges paid by the consumer, and also is subject to the 10% cumulative tolerance.

Remember that the comparison should be made between the sum of the charges actually paid by or imposed on the consumer with the sum of the estimated charges on the Loan Estimate that are actually performed. If a service is not performed, the estimate for that charge should be removed from the total amount of estimated charges.

In calculating the aggregate amount of estimated charges for purposes of conducting the good faith analysis, the aggregate amount of estimated charges must reflect charges for services that are actually performed.

For example, assume that the creditor included a $100 estimated fee for a pest inspection in the disclosures provided, and the fee is included in the charges. If the pest inspection was not obtained in connection with the transaction, then for purposes of the good faith analysis, the sum of all charges paid by or imposed on the consumer is compared to the sum of all such charges disclosed, minus the $100 estimated pest inspection fee.

Additionally there are several cases where the estimate for a specific service differs from the actual charge, but the lender is off the hook. Whether an individual estimated charge is in good faith depends on whether the sum of all charges subject to that section increases by more than 10%, even if a particular charge does not increase by 10%.

A creditor may charge more than 10% in excess of an individual estimated charge in this category, so long as the sum of all charges is still within the 10% cumulative tolerance.

As an example, if in the disclosures provided, the creditor includes a $300 estimated fee for a settlement agent, the settlement agent fee is included in the charges, and the sum of all charges (including the settlement agent fee) equals $1,000,then the creditor does not violate the rule if the actual settlement agent fee exceeds 10% (i.e., exceeds $330), provided that the sum of all such charges does not exceed 10% (i.e., $1,100).

Creditors are provided additional flexibility in disclosing individual fees by the focus on the aggregate amount of all charges. A creditor may charge a consumer for a fee that would fall under the 10% cumulative tolerance but was not included on the Loan Estimate so long as the sum of all charges in this category paid does not exceed the sum of all estimated charges by more than 10%.  

For example, let’s assume that in the disclosures the sum of all estimated charges equals $1,000. If the creditor does not include an estimated charge for a notary fee but a $10 notary fee is charged to the consumer, then the creditor does not violate the rule if the sum of all amounts charged to the consumer does not exceed $1,100, even though an individual notary fee was not included in the estimated disclosures.

Most of these tolerance guidelines are already being used today, but sometimes it helps to simply have verification of what rules are and aren’t changing.  However, the creditors will now have to retain evidence of compliance for three years after the later of the date of consummation, the date disclosures are required to be made, or the date action is required to be taken.

This increases the existing TILA records retention requirement of two years. Records must be maintained establishing that the creditor performed required actions, not just provided disclosures, including differentiating between affiliated and independent third parties for determining the applicable tolerances for settlement charges (for purposes of determining “good faith,” for reasons for revisions, and for calculating average charges).

Additionally, as the CFPB is trying to empower the consumers, there are other ways that the industry (and especially the creditors) will be affected. We have seen in the past consumers being confused and unable to communicate with their mortgage broker about the differences of loan estimates and the charges that are imposed on them during closing.

To make things more interesting, the CFPB recently announced that they want to publish anonymous complaints on the internet. They stated that this initiative will “provide important context to the complaint, help the public detect specific trends in the market, aid consumer decision-making, and drive improved consumer service.”

This sounds like a rather loaded approach. Although the creditors will need to find ways to protect their reputation, and be able to provide evidence of their compliance at any given time, all parties want to avoid going there. On the surface, no consumer wants a bad experience, and no professional wants the complaint.

The industry needs to provide a better way for all the parties to communicate with each other and stay educated and informed about the process. The consumer needs to be provided with an analysis that justifies (or not) an increase of the estimate ahead of time.

A digital close solution that gives this power and information to all the parties is all the consumers need to feel involved and empowered. Even better, a digital close solution that enables the consumer to communicate with his broker and get some questions answered ahead of time protects all parties and increases the chances of an error-free closing.

Sounds so simple when put that way, right? For more information on a solution like this, visit www.digitalclose.com. Still looking for answers to questions? Then go check out the helpful information and forum conversations started at the TILA-RESPA Knowledge Center. All you need to do is register for a free account, then you'll be able to browse the knowledge base or post topics in the forums.

All information and views expressed or implied are provided without warranty and are only the opinion of Pavaso, Inc. Each participant should seek legal representation for legal interpretation of the ruling and the CFPB directly for final instruction and interpretation. The final rule can be found here.

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