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Lending

Complying with TILA-RESPA tolerances, Part 2

Zero tolerance charges, and refunds in 60 days

Spring House

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

CFPB RESPA/TILA Rule Reference: 7.10-7.12, pages 38-39, CFPB detailed summary of the rule 

Today we’re wrapping up Section 7 of the TILA-RESPA Integrated Disclosure Rule.  To start with, there are items that creditors are not permitted to charge consumers more than the amount disclosed on the Loan Estimate under any circumstances, other than changed circumstances that permit a revised Loan Estimate.

In general, the rule states that an estimated closing cost disclosed is not in good faith if the charge paid by or imposed on the consumer exceeds the amount originally disclosed. Although there are exceptions to the general rule, the charges that remain subject to zero tolerance include, but are not limited to, the following:

1.     Fees paid to the creditor.

2.     Fees paid to a mortgage broker.

3.     Fees paid to an affiliate of the creditoror a mortgage broker.

4.     Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider for a settlement service.

5.     Transfer taxes.

But what constitutes a fee as “paid to” a creditor, mortgage broker, or affiliate?  Per the summary, “A charge is paid to the creditor, mortgage broker, or an affiliate of either if it is retained by that person or entity. A charge is not paid to one of these entities when it receives money but passes it on to an unaffiliated third party.”  So, a fee is not considered “paid to” a person if the person does not retain the fee.

Here’s an example straight from the CFPB’s eRegulations site that highlights changes to Regulation Z:

“If a consumer pays the creditor transfer taxes and recording fees at the real estate closing and the creditor subsequently uses those funds to pay the county that imposed these charges, then the transfer taxes and recording fees are not “paid to” the creditor. Similarly, if a consumer pays the creditor an appraisal fee in advance of the real estate closing and the creditor subsequently uses those funds to pay another party for an appraisal, then the appraisal fee is not “paid to” the creditor.”

And the example also clarifies further in terms of a reimbursement…

“A fee is also not considered “paid to” a person if the person retains the fee as reimbursement for an amount it has already paid to another party. If a creditor pays for an appraisal in advance of the real estate closing and the consumer pays the creditor an appraisal fee at the real estate closing, then the fee is not “paid to” the creditor, even though the creditor retains the fee, because the payment is a reimbursement for an amount already paid.”

The last note on fees subject to zero tolerance is how the CFPB defines “affiliate”, which is noted in Section 7.11 of the summary of the rule: “The term affiliate is given the same meaning it has purposes of determining Ability-to-Repay and HOEPA coverage: any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956.  (12 U.S.C. 1841 et seq.)”

So now that we’ve dug into the charges that aren’t permitted to change between the Loan Estimate and Closing Disclosure, let’s talk about what the TILA-RESPA rule requires.

Regarding refunds, it’s simply put that if the amounts paid by the consumer at closing exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer no later than 60 calendar days after consummation.  And here’s the simple breakdown of the two scenarios for a refund:

  • For charges subject to zero tolerance, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer.
  • For charges subject to a 10% cumulative tolerance, to the extent the total sum of the charges added together exceeds the sum of all such charges disclosed on the Loan Estimateby more than 10%, the difference must be refunded to the consumer.

Note that if an excess charge to the consumer is discovered after consummation and a refund is provided, the corrected disclosure must also be provided to the consumer.

As we pointed out in Part 1 of this post series, most of these tolerance guidelines are already being used today. But as we’ve mentioned before, businesses in the reformed mortgage industry will also be faced with greater potential for big blows to their margins in the form of new penalties for non-compliance. In fact, while penalties for RESPA violations of the past might have been in the neighborhood of $5,000 in total, Section 1055 of the Consumer Financial Protection Act of 2009 enables much higher figures to come into play. The stakes are raised even higher because these penalties are assessed per day rather than per infraction, and the violation doesn’t need to be “knowing” or “reckless” in order to merit a penalty.

  • “Knowing” violations — $1,000,000 per day
  • “Reckless” violations — $25,000 per day
  • Other violations — $5,000 per day

Higher consumer expectations will mean faster, more accurate service. Which will mean more pressure on the industry to catch errors and excess charges pre-closing.  Not to mention quickly turning around any possible refunds within the 60-day window post-consummation.

So, how do you achieve something like this today, and how long does that typically take?  What processes and technology do you have in place to help offset the liabilities of people who could potentially make mistakes (we’re all only human after all)?  And with all of the moving parts and pieces of the information of any particular closing, do you have the capability to efficiently communicate with all the business partners involved throughout the closing process?

Providing the appropriate analysis of any difference between the estimate and the charge to the consumer pre-closing will save him/her from feeling trapped during the closing process. The value of such a solution is equally important for the creditors. We have seen many cases where an error is produced by an honest human error but the lenders needs to pay fees and penalties. And in the end, keeping all the interested parties involved and informed from the beginning of the process can resolve these issues in a more honest and efficient way.

We've also posted an article in the TILA-RESPA Knowledge Center that takes this a step further to discuss the differences between the Loan Estimate and actual charges. All you need to do is register for a free account, then you’ll also 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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