Scope of Revised Loan Estimate at Rate Lock

QUESTION

We have a mortgage loan in which the appraisal fees were not disclosed in the initial Loan Estimate pursuant to the requirements of the TILA/RESPA Integrated Disclosure Rule (“TRID”). We have now locked the loan. Is it acceptable to include the appraisal fees in the Revised Loan Estimate when we re-disclose for the rate lock? 

ANSWER

This question really has two parts: (1) should the appraisal fees be included in the Revised Loan Estimate and (2) if so, can the disclosure of appraisal fees in the Revised Loan Estimate (rather than the non-disclosure in the original Loan Estimate) be used as the basis for determining whether the disclosures were made in “good faith” under Regulation Z Section 1026.19(e)(1)?

The answer to the first part is “yes.” Under Section 1026.37(f)(2) the Loan Estimate is required to itemize “each amount, and a subtotal of all such amounts, [that] the consumer will pay for settlement services for which the consumer cannot shop…and that are provided by persons other than the creditor or mortgage broker.” Appraisal fees normally fall within this section. If they weren’t disclosed in the original Loan Estimate, they need to be disclosed in the Revised Loan Estimate.

The answer to the second part of the question is a little more complicated. Under TRID, mortgage lenders are held to a “good faith” standard in disclosing fees and charges on the Loan Estimate [12 CFR 1026.19(e)(1)].  The general rule is that “good faith” is measured by comparing what is disclosed in the original Loan Estimate with what the consumer actually pays at consummation. [12 CFR 1026.19(e)(3)(i)]

There are certain exceptions to this general rule, however, one of which is when a Revised Loan Estimate is authorized. 

Section 1026.19(e)(3)(iv) of TILA specifies six (6) circumstances under which Revised Loan Estimate may be issued, one of which is the so-called “rate lock” exception. Thus, Section 1026.19(e)(3)(iv)(D) provides: 

(D) Interest rate dependent charges. The points or lender credits change because the interest rate was not locked when the disclosures required under paragraph (e)(1)(i) of this section were provided. No later than three business days after the date the interest rate is locked, the creditor shall provide a revised version of the disclosures required under paragraph (e)(1)(i) of this section to the consumer with the revised interest rate, the points disclosed pursuant to §1026.37(f)(1), lender credits , and any other interest rate dependent charges and terms. (Emphasis added.)

(Note: The other five (5) circumstances under which a Revised Loan Estimate may be issued are: (1) “Changed circumstances” that cause an increase to settlement charges; (2) "Changed circumstances” that affect the consumer’s eligibility for the loan or affect the value of the property  securing the loan; (3) Consumer-requested changes; (4) Expiration of the original Loan Estimate; and (5) Construction loan settlement delays.)

At first blush, the underlined language of Section 1026.19(e)(3)(v)(D) would appear to be broad enough to allow revised disclosures of all of the charges listed in § 1026.19(e)(1). 

That section, in turn, is likewise broad and provides: 

“(e) Mortgage loans—early disclosures—(1) Provision of disclosures—(i) Creditor. In a closed-end consumer credit transaction secured by real property or a cooperative unit, 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.)

This all seems to suggest that, once there is a valid “changed circumstance” or other triggering event authorizing a Revised Loan Estimate, the lender can revise anything that must be disclosed under §1026.37, including appraisal costs. 

However, the Official Commentary for § 1026.19(e)(3)(iv) indicates otherwise. It states that you can revise the original Loan Estimate disclosure “only to the extent that the reason for the revision… increased the particular charge.” 

Thus: 

“2. Actual increase. A creditor may determine good faith under § 1026.19(e)(3)(i) and (ii) based on the increased charges reflected on revised disclosures only to the extent that the reason for revision, as identified in § 1026.19(e)(3)(iv)(A) through (F), actually increased the particular charge. For example, if a consumer requests a rate lock extension, then the revised disclosures on which a creditor relies for purposes of determining good faith under § 1026.19(e)(3)(i) may reflect a new rate lock extension fee, but the fee may be no more than the rate lock extension fee charged by the creditor in its usual course of business, and the creditor may not rely on changes to other charges unrelated to the rate lock extension for purposes of determining good faith under § 1026.19(e)(3)(i) and (ii).” (Emphasis added.) 

Accordingly, while it is necessary to include the originally omitted appraisal fees in the Revised Loan Estimate issued in connection with a rate lock, those disclosures cannot be used to measure “good faith.” Instead, unless one of the other five grounds for a Revised Loan Estimate can be found to apply, the original Loan Estimate must be used. And, since the original Loan Estimate did not disclose any appraisal fees, those fees cannot be imposed on the consumer, or if they are, they will have to be refunded within 60 days of consummation pursuant to Section 1026.19(f)(v).

Michael Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group