QUESTION
We had a loan where the borrower shopped for the title company and did not use the company we had listed on the service provider list. Our provider does not charge us a separate recording fee, it is included in the “settlement fee” they charge.
In this instance, however, the title company selected by the borrower separately added to their charges the “recording fee” from the county recorder’s office. We were not notified of this within 3 days of receiving their contract and did not redisclose. We now have a tolerance cure that we are having to pay at closing.
Do you have any suggestions about how to avoid this in the future?
ANSWER
There are several parts of your question and part of the problem arises from the fact that your usual settlement service provider does not separately break out the fees paid to the county recorder’s office – fees that are assessed by and paid to a government authority to record and index the mortgage or deed of trust (rather than a fee payable to the title company for facilitating the recordation of documents).
The Integrated RESPA/TILA Disclosure Rule (“Know Before You Owe”) requires that these fees be broken out and separately disclosed. The pertinent part of Reg. Z (12 CFR 1026.37) provides:
“For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section…” (Emphasis added.) 12 CFR 1026.19(e) provides in pertinent part: “In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.” (Emphasis added.)
Section 1026.37(g) provides:
“(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g) (1) through (6) of this section.
(1) Taxes and other government fees. Under the subheading “Taxes and Other Government Fees, “the amounts to be paid to State and local governments for taxes and other government fees, and the subtotal of all such amounts, as follows:
(i) On the first line, the sum of all recording fees and other government fees and taxes, except for transfer taxes paid by the consumer and disclosed pursuant to paragraph (g)(1)(ii) of this section, labeled “Recording Fees and Other Taxes.” [In the CFPB Guidebook, the illustration used for the type of “government fees” referred to in this section is “recording fees.” (See section E of illustration below)] (Emphasis added.)
Thus, the “recording fee” should not be lumped into the title settlement fee, but rather listed separately in Section E of the Loan Estimate. Recognizing this requirement will alert you to clarify the charges of any settlement service provider when a separate “recording fee” is not identified in their charges.
However, you must still determine whether the “recording fees” being charged are the fees assessed by and paid to a government authority to record and index the mortgage or deed of trust, or a fee payable to the title company for facilitating the recordation of documents. The former are subject to a 10% tolerance, but the latter, if the title company is selected by the borrower, are not:
Thus, with respect to fees paid to a governmental entity, 12 CFR § 1026.19(e)(3)(i-ii) provides:
(3) Good faith determination for estimates of closing costs—(i) General rule. An estimated closing cost disclosed pursuant to paragraph (e) of this section is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed under paragraph (e)(1)(i) of this section, except as otherwise provided in paragraphs (e)(3)(ii) through (iv) of this section.
(ii) Limited increases permitted for certain charges. An estimate of a charge for a third-party service or a recording fee is in good faith if:
(A) The aggregate amount of charges for third-party services and recording fees paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed under paragraph (e)(1)(i) of this section by more than 10 percent;
(B) The charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and
(C) The creditor permits the consumer to shop for the third-party service, consistent with paragraph (e)(1)(vi) of this section.
(Emphasis added.)
The 2015 Supplement to 12 CFR 1026.19(e)(3)(ii) confirms that such fees are subject to the 10 percent tolerance requirement:
“4. RECORDING FEES. Section 1026.19(e)(3)(ii) provides that an estimate of a charge for a third-party service or recording fees is in good faith if the conditions specified in § 1026.19(e)(3)(ii)(A), (B), and (C) are satisfied. Recording fees are not charges for third-party services because recording fees are paid to the applicable government entity where the documents related to the mortgage transaction are recorded, and thus, the condition specified in § 1026.19(e)(3)(ii)(B) that the charge for third-party service not be paid to an affiliate of the creditor is inapplicable for recording fees. The condition specified in § 1026.19(e)(3)(ii)(C), that the creditor permits the consumer to shop for the third-party service, is similarly inapplicable. Therefore, estimates of recording fees need only satisfy the condition specified in § 1026.19(e)(3)(ii)(A) to meet the requirements of § 1026.19(e)(3)(ii).” (Emphasis added.)
With respect to charges for third party services other than fees assessed by and paid to a government authority to record and index the mortgage or deed of trust, where the service provider is selected by the consumer and all of the other requirements are met, the service provider charges do not appear to be subject to tolerance tests. Thus, 12 CFR § 1026.19(e)(3)(iii) provides:
(iii) Variations permitted for certain charges. An estimate of the following charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount paid by the consumer exceeds the amount disclosed under paragraph (e)(1)(i) of this section:
(A) Prepaid interest;
(B) Property insurance premiums;
(C) Amounts placed into an escrow, impound, reserve, or similar account;
(D) Charges paid to third-party service providers selected by the consumer consistent with paragraph (e)(1)(vi)(A) of this section that are not on the list provided pursuant to paragraph (e)(1)(vi)(C) of this section; and
(E) Charges paid for third-party services not required by the creditor. These charges may be paid to affiliates of the creditor.
(Emphasis added.)
The 2015 Supplement to 1026.19(e)(3)(iii) confirms this:
“2. GOOD FAITH REQUIREMENT FOR REQUIRED SERVICES CHOSEN BY THE CONSUMER.
If a service is required by the creditor, the creditor permits the consumer to shop for that service consistent with § 1026.19(e)(1)(vi)(A), the creditor provides the list required by § 1026.19(e)(1)(vi)(C), and the consumer chooses a service provider that is not on that list to perform that service, then the actual amounts of such fees need not be compared to the original estimates for such fees to perform the good faith analysis required by § 1026.19(e)(3)(i) or (ii). Differences between the amounts of such charges disclosed pursuant to § 1026.19(e)(1)(i) and the amounts of such charges paid by or imposed on the consumer do not constitute a lack of good faith, so 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. “ (Emphasis added.)
Thus, even though the settlement agent is selected by the borrower, the creditor must still exercise reasonable diligence in investigating and disclosing their fees. The 2015 Supplement goes on to explain:
“For example, if the consumer informs the creditor that the consumer will choose a settlement agent not identified by the creditor on the written list provided pursuant to § 1026.19(e)(1)(vi)(C), and the creditor subsequently discloses an unreasonably low estimated settlement agent fee, then the under-disclosure does not comply with § 1026.19(e)(3)(iii). If the creditor permits the consumer to shop consistent with § 1026.19(e)(1)(vi)(A) but fails to provide the list required by § 1026.19(e)(1)(vi)(C), good faith is determined pursuant to § 1026.19(e)(3)(ii) instead of § 1026.19(e)(3)(iii) regardless of the provider selected by the consumer, unless the provider is an affiliate of the creditor in which case good faith is determined pursuant to § 1026.19(e)(3)(i).” (Emphasis added.)
As you can see, this is a highly technical area.
So, please do not hesitate to contact us or your attorney if you need help.
Michael R. Pfeifer
Director/Legal & Regulatory ComplianceLenders Compliance Group
