Historically, mortgage loan originators have used a variety of methods to estimate property taxes when preparing a Good Faith Estimate. Some lenders have approximated the amount based upon their knowledge of the local area where the property is located. Others have used third-party resources to obtain property information and then generate estimates from that data.
Still others have had their staff visit or call local tax agencies to gather the necessary information. And, many have disclosed zero amounts on the GFE with the intent of updating the information prior to closing.
Needless to say, post-TILA-RESPA Integrated Disclosure, we’re in a completely different world when it comes to providing timely and – more importantly – accurate information to borrowers.
While the mortgage industry may have been able to proceed for decades without a unified standard for property tax disclosures, and used a variety of ways to calculate the amounts for initial estimates, that’s just not sufficient any longer.
In April of this year, the Consumer Financial Protection Bureau hosted a webinar during which its representatives set out to clarify many of the specific loan estimate requirements of TRID, including those related to property taxes.
Since there has been little formal guidance provided to the mortgage industry by the CFPB, many industry participants have had to rely on these webinars to get clarification into the requirements.
Achieving a standard
During the April webinar, CFPB representatives stated that lenders estimating a borrower’s property taxes for the Loan Estimate must use the “best information reasonably available.” To some, that might seem, at best, a general, interpretive standard.
However, the CFPB representatives were specific in calling out the practice of guessing property taxes or entering a zero amount on the Loan Estimate and updating it later as being in violation of both the spirit and the letter of TRID requirements. There must be a firm foundation to a lender’s estimate, and it was conveyed that the best foundation is public records.
Lenders today already have the opportunity to partner with data providers that can facilitate access to fast, accurate tax data on nearly every property from every collecting agency in the United States.
While this is not yet a specific requirement of TRID, it is a best practice, and it should be a standard the industry is working toward.
At a minimum, lenders should be utilizing a combination of technology and data to access the best public tax information reasonably available. Under TRID guidelines, lenders have three days in which to complete the Loan Estimate. Given the availability of public records information from third-party data providers, this is more than enough time to arrive at a functional estimate that will meet the CFPB’s standard for property tax disclosures.
In fact, the best data and analytics providers can pull acceptable tax information in a matter of minutes.
In most cases, the amount will indeed be an estimate – as opposed to a precise tax amount for a specific property – calculated from aggregate surrounding property record information. By looking at surrounding properties, it becomes possible to estimate the tax rate, and then based upon the actual purchase price, to calculate what the taxes will likely be.
For the purposes of the Loan Estimate, this method is sufficient, and is still far better than many of the historical processes it would replace.
Reach for a gold standard
However, given that an acceptable estimate can be arrived at within minutes, and the lender has three days to work with, this should hardly be the end goal when so much more can be accomplished.
In fact, it may make the most sense to use that time for a “once and done” approach that not only can achieve compliance with Loan Estimate requirements, but also can streamline business processes. Lenders can use the same tax data to provide a very accurate Closing Disclosure, and assess the correct amounts to collect for escrow.
While achieving compliance with the CFPB’s requirements for the Loan Estimate, the lender could easily be setting the stage for a more streamlined closing. With current tax bill data on nearly every property in the United States readily available, lenders can provide an accurate and consistent tax amount on the Loan Estimate and Closing Disclosure forms, and can even set up escrow amounts when the property is ready to move into closing. The result is lower application-to-close costs and a more efficient process.
All of this is key to achieving compliance with TRID and supporting the CFPB’s efforts toward a more informed borrower, and it is what all forward-thinking loan originators want – the best borrower experience possible.
Remember, even after the loan has closed, and the file has moved on for servicing, the borrower experience is still tied to the tax bill, and those escrow payments.
Giving borrowers more accurate tax estimates earlier in the application process – with the amount remaining consistent throughout the process, and into their homeownership – lenders will likely find that the best borrower experience perfectly aligns with the standards as outlined by the CPFB. And, as improving the borrower experience leads to higher retention rates, more cross-selling, repeat business and referrals, these are clearly best business practices as well.