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Thursday, October 31, 2013

Changed Circumstance and Increasing the Origination Fee

QUESTION 
If the origination fee is a percent of the loan amount, and the loan amount INCREASES due to a higher appraised value than originally used on the GFE, is the origination fee charged at settlement allowed to increase under the COC, with proper re-disclosure? 

ANSWER
Bottom Line Up Front: “Yes, but only if issuance of a revised GFE is permissible under 24 CFR § 3500.7(f). In particular, if the loan amount changes and all or a portion of Block 1 is calculated as a percentage of the loan amount, then that portion in Block 1 may be recalculated.” (HUD RESPA FAQs, April 2, 2010)

In the answer quoted above, HUD was responding to the following: “If all or a portion of the charge in Block 1 is calculated as a percentage of the loan amount, and the loan amount changes, can the loan originator issue a revised GFE with an updated charge in Block 1?” 

Your question differs from the question HUD answered in one significant way. Your question premises the increased origination fee on the increased loan amount, and the increased loan amount on the increased appraisal value. HUD points out that “yes”, the origination fee may increase if charged as a percentage of the increased loan amount, and if permissible under RESPA. It does not address your implied, underlying question of whether the higher appraised value may be the causal justification for higher origination fees.

The analysis is important because the loan originator bears the burden of demonstrating compliance when a GFE is revised for purported “Changed Circumstances”, and documentation of that reason must be maintained with the loan records for examination by your regulator. Revisions to the GFE charges are allowed if permissible under 24 CFR § 3500.7(f), (which points to 24 CFR (§3500.2(b); §3500.7(f)(1) and (f)(2)), in other words, “Changed Circumstances”. Your increased origination fee is not permissible if based merely on “a higher appraised value than originally used on the GFE”.

A higher appraisal value may be an alluring opportunity to increase the loan amount as a proxy in justification of higher origination fees. It is well established that a consumer is not obliged to increase the requested loan amount on the basis of improved valuation of over GFE. In fact, the consumer could choose to reduce the requested loan amount. As long as the loan amount remains unchanged, or lowered, there would be no permissible reason to increase origination charges. A loan originator engages in the prohibited conduct of steering if he or she persuades a consumer to obtain a higher loan amount for the purpose of generating higher origination fees.

Increased appraisal valuations may justify compliant GFE revisions, including consumer requested increase in the loan amount, resulting in organic, permissible increase in origination charges. Another permissible change occurs when a higher appraised value decreases the LTV and eliminates the need for previously estimated PMI charges. Conversely, a lower appraised value could increase settlement charges and trigger PMI costs. It is important to have thoroughly documented information supporting any “Changed Circumstances”, and the verifiable and compliant reasons for such change. Under RESPA a loan originator must provide the revised GFE within three business days of the borrower’s requested change.

Wendy Bernard
Director/Legal and Regulatory Compliance
Lenders Compliance Group