Defining a Finance Charge

QUESTION 

We had asked our loan officers to tell us what areas in originating loans seem most complicated to them. Then, we compiled their answers. 

Many things confused them about TILA. They had a decent understanding of consummation and timeliness. However, they were unable to make sense of the finance charge. 

In the 2021 year-end meeting, we decided to contact you. 

What goes into making a finance charge? 

ANSWER 

The finance charge has baffled loan officers and consumers virtually from its inception. There is so much case law and disputes and settlements relating to the finance charge that one would need a detailed map to navigate through the iterations, zooming in and out of the ever-circuitous fractals. I will respond within the limits of this space, so whereas brevity is the soul of wit, for now, it will suffice as no more than a teaser. If there is an ongoing concern, I think you might want to do some training on finance charges. Use a reliable trainer or us. 

Let’s get consummation and timeliness out of the way, as they, along with the finance charge, are three essential concepts that underlie Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA). 

We can define consummation to mean the time when a consumer becomes contractually obligated on a credit transaction. This definition is critical because Regulation Z requires all closed-end credit disclosures to be made to the consumer before consummation. A creditor should not require a consumer to sign and return a commitment letter or other binding loan contract for a closed-end consumer credit transaction unless: (1) timely TILA disclosures have been provided before the document was signed, or (2) the document has been carefully drafted to avoid obligating the consumer to complete the loan transaction. 

With respect to timeliness, while TILA disclosures must be in a form the consumer can keep, the TILA-related disclosures typically are given when the form, such as a note (or retail installment contract), containing the disclosures (on its face) is handed to the consumer to be read and then signed (certainly, before consummation – that is, before the consumer is in any manner obligated on the transaction). Regulation Z states: “The disclosures need not be given any particular time before consummation.”[i] 

But, special timing rules do apply to the integrated disclosures required by TILA and the Real Estate Settlement Procedures Act (RESPA) (viz., Loan Estimates and Closing Disclosures), high-cost mortgage (HCM) disclosures, variable-rate transactions secured by the consumer’s principal dwelling with a term greater than one year, and private education loans. A creditor should not simply show a copy of the disclosures to the consumer before the consumer signs and becomes obligated,[ii] given specific performance requirements: 

“The disclosure requirement is satisfied if the creditor gives a copy of the document containing the unexecuted credit contract and disclosures to the consumer to read and sign; and the consumer receives a copy to keep at the time the consumer becomes obligated. It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing."[iii] 

Now, let’s move on to the finance charge. 

As a generic approach to understanding the finance charge, a recent case in the federal district court in Connecticut helps to set us off on the discussion. It not only defined consummation and timeliness but also provided a good definition of a finance charge. In Sparano v. JLO Auto,[iv] the court noted the specific – some might even say “peculiar” – rules regarding the term “finance charge.” Regulation Z defines “finance charge” as “the cost of consumer credit as a dollar amount.” The term includes[v] 

“…  any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.”[vi] 

I have given you a broad starting point. So, now I would like to offer a response directed at your loan officers, those individuals who need practical advice more than cringe-worthy legal theory. I will provide a categorized outline of the types of concerns that often befuddle and confound loan officers. 

Dollar Amount 

The finance charge is the cost of consumer credit as a dollar amount.[vii] This is not often recognized. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the lender as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. 

To determine whether an item is a finance charge, a lender should compare the credit transaction in question with a similar cash transaction. For instance, taxes or registration fees paid by both cash and credit customers are not finance charges. However, inspection and handling fees for the staged disbursement of construction loan proceeds are finance charges. Charges absorbed by a lender as a cost of doing business are not finance charges, even though the lender may consider the costs in determining the interest rate to be charged or the cash price of the property or service sold. Thus, a discount imposed on a credit obligation when a seller-creditor assigns it to another party is not a finance charge as long as the discount is not separately imposed on the consumer.[viii]

Accurate and Reasonable Disclosures

QUESTION

You may feel that our question is unusual. Still, we think it involves concerns that many people have relating to disclosures, particularly how to determine if a disclosure is accurate or inaccurate.

In my experience, this issue comes up a lot. We use document vendors, but we are relying too much on them for accuracy. We found this out the hard way when a regulator found that one of the TILA disclosures was inaccurate and unreasonable.

The idea of accuracy makes sense, but this notion of reasonableness seems pretty subjective to us.

So, we want to know what is considered reasonable in TILA disclosures?

ANSWER

Your question is not as unusual as you may think. Our compliance professionals are often presented with providing guidance on disclosure compliance. We consider several factors, one of which is the reasonableness of the disclosures.

Regulation Z[i] includes several rules regarding disclosures, including the basis on which disclosures must be given, the use of estimates, and the treatment of irregularities.

Here’s a good rule of thumb for you to follow when reviewing a disclosure: it must reflect the terms of the legal obligation between the parties.

For example, suppose a borrower executes an unsecured note that provides for the total debt to be due five years from the date of the loan. In that case, disclosures must be based on the 5-year term, even if the borrower might informally promise to make monthly or quarterly payments of accrued interest. In other words, disclosures must reflect the credit terms to which the parties are legally bound at the outset of the transaction.

Furthermore, under Regulation Z[ii], if any information necessary for an accurate TILA disclosure is unknown to the creditor, the creditor must make the disclosure based on the best information reasonably available and state that the disclosure is an estimate. This provision provides that disclosures may be estimated if the exact information is unknown at the time the disclosures are made. The provision is based on a section of TILA[iii] that authorizes the CFPB to provide by regulation that any portion of the information TILA requires to be disclosed may be given in the form of estimates when the provider of the information is not in a position to know exact information.

Under Regulation Z, a creditor has no liability for an inaccurate disclosure if the necessary information is not reasonably available by the time of consummation. However, even if a disclosure is validly marked as an estimate before consummation, the creditor may still be required to redisclose when more accurate information becomes available by the time of consummation.[iv]

The estimates must be made in good faith, based on the best information reasonably available, and designated as estimates in the segregated disclosures. Under Regulation Z, as to open-end credit[v] and closed-end credit[vi], creditors are required to make disclosures based on the “best information reasonably available” and to state that the disclosure is an estimate when “any information necessary for an accurate disclosure is unknown.”

A case involving a military veteran illustrates the juncture of “best information reasonably available” and when “any information necessary for an accurate disclosure is unknown.” Let’s check it out.

In Pennsylvania, a federal district court recently examined these requirements in light of a lender’s disclosure of property taxes based on an expected exemption for a borrower.[vii] In some states, such as Pennsylvania, a military veteran may be exempted from paying local property taxes under certain circumstances.

Nelson, a retired, 100-percent disabled military veteran, obtained a home mortgage loan from Acre Mortgage. Under a state program, veterans classified as 100-percent disabled could be exempted from paying local property taxes so long as their income fell below a statutory maximum. Although officials made determinations regarding the income-eligibility criteria with the state veterans’ commission, county veterans' offices handled applications for the exemption.

In her loan application, Nelson disclosed a monthly income of $7,086.83, including $1,510 in social security disability benefits, $2,906.83 in non-educational veterans’ benefits, and $2,670 in military pension benefits. She did not disclose any other income, and, at closing, she signed a statement acknowledging the income information to be true and correct.

In conducting its due diligence before closing, Acre Mortgage consulted the county officials to confirm that property taxes could be excluded. Based on Nelson's income information to Acre Mortgage, county officials informed Acre Mortgage that Nelson should be eligible for the property tax exemption. Nelson also had previously spoken with county officials.

One or two days before closing, Acre Mortgage again contacted county officials to confirm Nelson’s eligibility for the tax exemption, and the county informed Acre Mortgage that, based on the income information submitted to the lender, she was eligible, but that the exemption could not be formally granted until Nelson had title to the property. Accordingly, Acre Mortgage excluded property taxes from the loan disclosures and closing documents.

In December 2015, after closing, Nelson applied for the veteran property tax exemption. In February 2016, the state veterans’ commission notified her that she was not eligible for an exemption because she received educational benefits that increased her income above the statutory maximum for eligibility.

Nelson completed a graduate degree program in May 2016 and then no longer received educational veterans’ benefits. Her income fell below the statutory maximum, and in 2017 she was granted the tax-exempt status.

She sued Acre Mortgage, including TILA violations among other claims. She claimed that Acre Mortgage had provided disclosures on the wrong forms (by failing to use the Loan Estimate and Closing Disclosure and instead using Good Faith Estimate and other forms that had preceded the implementation of the Loan Estimate and Closing Disclosure), failed to disclose local property taxes, and failed to make a reasonable and good faith determination of her ability to repay the loan.

The court dismissed her TILA claims. Evidence showed that Nelson had failed to disclose her educational veterans’ benefits as income and further indicated that Acre Mortgage had relied on the representations of both Nelson and county officials regarding her eligibility for the disabled veterans’ property tax exemption. Evidence also showed that Acre Mortgage had acted in good faith and exercised due diligence in seeking to determine whether property taxes could be excluded from her estimated monthly payment and other mortgage loan disclosures.

In addition, evidence showed that Acre Mortgage had based the TILA disclosures on the best information reasonably available at the time the disclosures were provided and had clearly stated that the disclosures were estimates.

Finally, evidence showed that the ability-to-repay determination was based on the best information reasonably available at the time of loan consummation. No reasonable jury could have returned a verdict in favor of Nelson with respect to whether Acre Mortgage had made a reasonable and good faith determination of ability to repay or whether Acre Mortgage had adequately disclosed Nelson’s local property tax obligations or estimated monthly payments.

The court also held that Acre Mortgage had used the proper disclosure forms, as the TRID disclosure forms (viz., Loan Estimate and Closing Disclosure) were not required until after Nelson submitted her loan application.

TRID disclosure requirements took effect for applications received on or after October 3, 2015, but Acre Mortgage received Nelson’s application on September 24, 2015.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] § 1026.17(c)
[ii] § 1026.17(c)(2)
[iii] TILA § 121(c), 15 U.S.C. § 1631(c)
[iv] As set forth in Regulation Z § 1026.17(f), see “early disclosures when a subsequent event renders them inaccurate.”
[v] §§ 1026.5(c)
[vi] 1026.17(c)(2)
[vii] Nelson v. Acre Mortgage & Finance, Inc., 2020 U.S. Dist. (M.D. Pa. Sept. 25, 2020)

Title Insurance Disclosure on the LE and CD

QUESTION

Title insurance disclosure is a challenge for our organization. For the most part, we believe we have a good understanding of how to disclose. But there are a few areas where we could use some clarification. Our interest is how to disclose title insurance on the LE and the CD. 

Thank you for the FAQ. It is the only FAQ like it in the country, and we really appreciate it.

Here are the questions that we have put together for you to answer on the weekly FAQ. I hope you can respond soon. 

For lender’s title insurance, how should we disclose the premium on the LE?

For owner’s title insurance, how do we disclose if the lender does not require it?

Given that a single rate is sometimes used, how do we disclose on the LE and CD?

Finally, if there is a single rate and the seller pays the owner’s premium, how do we disclose?

ANSWER

Thank you for your kind words. We have been providing the FAQ for many years and look forward to continuing our commitment to bringing such information to the mortgage community.

Let’s start with your first question and take it from there!

For lender’s title insurance, how should we disclose the premium on the LE?

Lender’s title insurance is disclosed as the amount of the premium on the Loan Estimate (“LE”). The amount may be disclosed as Title - Premium for Lender’s Coverage (or any similar language as long as it clearly indicates the amount of the premium disclosed and that the premium is for lender’s title insurance coverage). 

On the Closing Disclosure (“CD”), the cost of lender’s title insurance is disclosed in the Loan Costs Table under either Services Borrower Did Not Shop For or Services Borrower Did Shop For, depending on whether the consumer did or did not shop for the lender’s title insurance, and with a similar label.[i]

For owner’s title insurance, how do we disclose if the lender does not require it?

As you may know, in most cases the lender does not require the consumer to obtain owner’s title insurance. Nevertheless, if the consumer obtains owner’s title insurance and the creditor does not require it, the cost of owner’s title insurance is disclosed in Closing Cost Details in the Other Costs Table on the LE and CD. Generally, the amount disclosed for owner’s title insurance is based on the owner’s policy rate. 

For the LE, the cost disclosed for the owner’s title insurance policy is not based on any enhanced title insurance policy rate - where "enhanced" provides additional coverage and may increase the amount of coverage as the property appreciates - unless the creditor knows (or has reason to believe at the time the creditor is issuing the LE) that an enhanced owner’s title insurance policy will be purchased, such as if it is required by the real estate sales contract. In any event, when the consumer purchases owner’s title insurance and it is not required by the creditor, this fact is noted on the LE and CD through the use of the term “optional.” 

If the seller pays for the owner’s title insurance, the “optional” description is not required on the CD.[ii]

Given that a single rate is sometimes used, how do we disclose on the LE and CD?

Let’s define the terms. Title companies often offer a different rate, called a single or simultaneous rate, if a consumer purchases both lender’s and owner’s title insurance from the same company, rather than purchasing each policy from separate companies.

There is a formulaic way to assist lenders in disclosing the required rates consistently, that is, in a way that does not depend on (1) whether the consumer purchases lender’s and owner’s title insurance policies individually, (2) obtains the policies from the same company and gets the simultaneous rate, or (3) buys only the required lender’s title insurance.

Note: If the consumer obtains only the required lender’s title insurance policy and no owner’s title insurance policy, the use of this formula by the creditor is not necessary.

Here’s a formulaic outline for the premium of an owner's title insurance policy for which there is a simultaneous issuance of a lender's and an owner's policy, and then disclosed on the LE and CD:

Step 1: Determine the full owner’s policy premium.

Step 2: Add this amount to the simultaneous premium for the lender’s policy.

Step 3: Now subtract out the full lender’s premium.

Note: The premium disclosed for the lender’s title insurance policy is the full lender’s premium, not the discounted, or simultaneous, rate.[iii]

Finally, if there is a single rate and the seller pays the owner’s premium, how do we disclose?

The answer to this question requires a brief preamble. There may be a difference between the cost of owner’s title insurance disclosed and the disclosed seller’s credit, if the purchase and sales contract between the consumer and seller indicates that both lender’s and owner’s title insurance will be purchased from the same company and the seller will pay the full owner’s policy premium rate (as opposed to a discounted rate).

I realize that’s a mouthful! So, to put this succinctly, assuming the scenario, given the disclosure formula for the owner’s title insurance cost when there is a simultaneous rate for lender’s title insurance, there may be excess seller’s credit beyond the disclosed cost of owner’s title insurance.

Because the seller’s credit may be in excess of the owner’s disclosed title insurance cost, the disclosed amount of the seller credit left over after application to the owner’s title insurance cost may be disclosed in three different ways on the CD:

1. Shown as a credit towards the amount of the lender’s premium or any other title insurance costs for premiums or endorsements in the Loan Costs Table or Other Costs Table;[iv] or

2. Added to and shown in aggregate with other seller credits in the Summaries of Transactions tables as a general Seller Credit;[v] or

3. Disclosed as a standalone seller credit on another blank line in the Summaries of Transactions tables.[vi]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] See 12 CFR § 1026.37(f)(2) and (f)(3); Comment 37(f)(2)-4; 12 CFR § 1026.38(f)(2) and (f)(3); and Comments 38(f)(2)-1 and 37(f)(2)-3

[ii] 12 CFR §§ 1026.37(g)(4) and 38(g)(4); Comment 37(g)(4)-1; 12 CFR §§ 1026.37(g)(4)(ii) and 38(g)(4)(ii); Comments 37(g)(4)-1, -3, and 38(g)(4)-2; Comment 38(g)(4)-2; 12 CFR §§ 1026.37(f)(2); 37(f)(3); and 38(f)(2) and 38(f)(3)

[iii] Comments 37(g)(4)-2 and 38(g)(4)-2

[iv] 12 CFR §§ 1026.38(f) and (g)

[v] 12 CFR § 1026.38(k)(2)(vii)

[vi] 12 CFR § 1026.38(k)(2)(viii)

Revised Loan Estimate: If Address Change in New Construction is a “Changed Circumstance”

QUESTION

I have a file that is new construction and the city has changed the numerical part of the address since initial disclosures were sent. Would this be a valid change of circumstances requiring a revised Loan Estimate?

ANSWER

This question really has two parts, one that is express, the other implied:  (1) Does a change in the address of the real property security for a mortgage loan require a revised Loan Estimate; and (2) if so, does this qualify as a “valid changed circumstance” under 12 CFR §1026.19(e)(3)(iv) authorizing revisions to the disclosures of settlement charges in the original Loan Estimate?

The answer to the first part is “yes,” even though the physical location of the property has not changed.  Under 12 CFR §1026.17(e) of Regulation Z, the implementing regulation for the Truth in Lending Act (TILA), “[i]f a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this part, although new disclosures may be required under paragraph (f) of this section, §1026.19, §1026.20, or §1026.48(c)(4).

Paragraph (f) provides:

“Except for private education loan disclosures made in compliance with §1026.47, if disclosures required by this subpart are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the creditor shall disclose before consummation (subject to the provisions of §1026.19(a)(2), (e), and (f))…(1) Any changed term unless the term was based on an estimate in accordance with §1026.17(c)(2) and was labeled an estimate…” (Emphases added.)

Here, the address of the property securing the loan is a basic “term” of the loan. [See e.g., the Official Mortgage Loan Transaction Loan Estimate Model Form (Appendix H24A to 12 CFR 1026)] It has changed. Therefore, under §1026.17(e) and (f)) a revised Loan Estimate is required to disclose the changed address.

The answer to the second part of the question is a little more complicated. Under the RESPA-TILA Integrated Disclosure Rule (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. Section 1026.19(e)(3)(iv) of Regulation Z specifies six (6) circumstances under which a Revised Loan Estimate can be issued, the first of which (and that which is relevant here) is a “changed circumstance affecting settlement charges.”[1] In that regard, 1026.19(e)(3)(iv)(A) provides:

 

(A) Changed circumstance affecting settlement charges. Changed circumstances cause the estimated charges to increase or, in the case of estimated charges identified in paragraph (e)(3)(ii) of this section, cause the aggregate amount of such charges to increase by more than 10 percent. For purposes of this paragraph, “changed circumstance” means:

(1) An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;

(2) Information specific to the consumer or transaction that the creditor relied upon when providing the disclosures required under paragraph (e)(1)(i) of this section and that was inaccurate or changed after the disclosures were provided; or

(3) New information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under paragraph (e)(1)(i) of this section. (Emphases added.)

Here, since the city’s change to the numerical part of the project address is specific to the transaction and was apparently unexpected and/or beyond the control of any interested party, the address change may qualify as a “valid changed circumstance” authorizing changes to settlement charges in the original Loan Estimate under 12 CFR §1026.19(e)(3)(iv)(A). However, only those settlement charges that the address change “caused” to be increased may be reflected in the revised Loan Estimate.  In that regard, the Official Commentary for § 1026.19(e)(3)(iv) indicates 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).” (Emphases added.)

The address change you have described would not permit a revised Loan Estimate across a whole spectrum of settlement charges, but only as to those changed settlement charges “caused” by the numerical address change. Your question does not indicate what, if any, specific settlement charges have changed due to this address change. And the only one that comes to mind immediately might be the appraisal charges under 12 CFR 1026.37(f)(2) if, for example, the appraisal needs to be revised because of the address change and the appraiser wants an increased fee to prepare that revision.

On new construction, however, it is not unusual for there to be a change to the official address before the final inspection, so this may have been anticipated by the appraiser and no new appraisal or increased appraisal charges needed. Thus, the determination of whether specific increases in settlement charges can be disclosed in a revised Loan Estimate occasioned by the property’s address change must await receipt of further information.

Michael R. Pfeifer
Director / Legal & Regulatory Compliance
Lenders Compliance Group

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[1] The other five are as follows: (1) “Changed circumstances” that affect the consumer’s eligibility for the loan or affect the value of the property securing the loan; (2) Consumer-requested changes; (3) Interest rate dependent charges; (4) Expiration of the original Loan Estimate; and (5) Construction loan settlement delays.

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

TRID Disclosures for Mortgage Assumptions

QUESTION

We are a mortgage lender and servicer with a large servicing portfolio. Recently, the CFPB published a Fact Sheet about the circumstances involving the disclosures of the LE and the CD for certain transactions. Our interest is in the assumption transactions. What disclosures are required for these types of transactions? What is the disclosure process?

ANSWER

The Consumer Financial Protection Bureau (CFPB) issued a Fact Sheet titled “Are Loan Estimates and Closing Disclosures Required for Assumptions?” (“Fact Sheet”). The purpose of the Fact Sheet was to discuss the circumstances under which a Loan Estimate (LE) and Closing Disclosure (CD) are required under the Truth-in-Lending Act/Real Estate Settlement Procedures Act (TILA-RESPA) Integrated Disclosure Rule (TRID Rule) for a specific group of transactions.

The Fact Sheet may be found on the CFPB’s TILA-RESPA Disclosures webpage.

If you need guidance in how best to implement the disclosure process, we have an entire group devoted to mortgage servicing compliance. Contact us for servicing compliance support.

The Fact Sheet contains a flowchart to help you decide whether the disclosures are necessary. You may wish to compare this flowchart to your mortgage documents to ensure that the proper documentation is being prepared, depending on the type of application received.

The flowchart is a quick reference that highlights the major questions to be answered when determining if a LE and CD are required for the assumption transactions described in the narrative portion of the Fact Sheet.

In providing an answer to your question, I am going to address the narrative information offered in the Fact Sheet.

Briefly, a mortgage assumption is the conveyance of the terms and balance of an existing mortgage to the purchaser of a financed property, commonly requiring that the assuming party is qualified under lender or guarantor guidelines. Your institution may have specific policies and procedures for assumptions as part of an overall credit policy, and your state may also have certain regulations regarding assumable mortgages. In terms of the contract, the mortgage note generally governs the legality of assumptions. However, in terms of the TRID rule, Regulation Z is the guidepost for disclosures for assumptions. The Fact Sheet addresses disclosures for specific types of transactions, regardless of what each institution might call the transaction.

The Fact Sheet pertains to transactions:

• In which a new consumer is being added or substituted as an obligor on an existing consumer credit transaction;
• That are closed-end consumer credit transactions secured by real property or a cooperative unit; and,
• That are not reverse mortgages subject to 12 CFR 1026.33.

To answer your question about the required disclosures, determine if you have a loan application that is subject to the TRID Rule, that is, a transaction that is a closed-end consumer credit transaction secured by real property or a cooperative unit and that is not a reverse mortgage subject to 12 CFR 1026.33. Then, determine if the transaction is an assumption as that term is specifically defined in Regulation Z, 12 CFR 1026.20(b).

Drilling down further, an assumption under 12 CFR 1026.20(b) occurs when a creditor expressly agrees in writing to accept a new consumer as a primary obligor on an existing residential mortgage transaction. Generally, to satisfy this particular definition of assumption, a transaction must meet the following three elements:

1. Include the creditor’s express acceptance of the new consumer as a primary obligor. However, take note, the mere addition of a guarantor to an obligation for which the original consumer remains primarily liable does not give rise to an assumption under 12 CFR 1026.20(b).
2. Include the creditor’s express acceptance in a written agreement. For a transaction to be an assumption under 12 CFR 1026.20(b), it must include a written agreement, and that written agreement must include the creditor’s express acceptance of the new consumer.
3. Be a residential mortgage transaction as to the new consumer. A residential mortgage transaction is a transaction in which a security interest is created or retained in the new consumer’s principal dwelling and which finances the acquisition or initial construction of the new consumer’s principal dwelling. [See 12 CFR 1026.2(a)(24)]

If the transaction is an assumption under 12 CFR 1026.20(b), the creditor must provide a LE and CD, unless the transaction is otherwise exempt from these requirements.

Here’s an example, using the preceding guidelines. Certain housing assistance loans are otherwise exempt from the requirements to provide a LE and CD. The creditor must make the disclosures in the LE and CD based on the remaining obligation. For instance, the amount financed is the remaining principal balance plus any arrearages or other accrued charges from the original consumer credit transaction.

Similarly, in determining the amount of the finance charge and the annual percentage rate to be disclosed, the creditor should disregard any prepaid finance charges paid by the original obligor but must include in the finance charge any prepaid finance charge imposed in connection with the assumption transaction. If the creditor requires the new consumer to pay any charges as a condition of the assumption, those sums are prepaid finance charges as to that consumer, unless exempt from the finance charge under 12 CFR 1026.4.

According to Regulation Z commentary, if a creditor adds a new consumer to an existing consumer credit transaction (regardless of whether that event triggers the requirement to provide a LE and CD), the extension of credit remains a consumer credit transaction under Regulation Z. Thus, the creditor, assignee, or servicer must comply with any ongoing obligations pertaining to the consumer credit transaction, such as servicing-related requirements. Furthermore, even if the event does not trigger the requirement to provide a LE and CD, it may trigger other disclosure requirements under TILA or RESPA.

Jonathan Foxx, Ph.D., MBA
Managing Director
Lenders Compliance Group

Rate Lock Fee Disclosures: Expiration Challenges

QUESTION

We just completed an OCC examination. In the exit interview, we were asked about how we treat rate lock fees if the rate lock expires due to the way we processed the loan. What are the challenges that we could face if there is a rate lock expiration due to us causing the delay in closing?

ANSWER

This is an important question and touches not only on regulatory guidelines but also on case law, which, in many instances, is extensive. The regulatory rules may seem straight-forward; however, this is an area of quite a lot of litigious battles. One recent case serves to highlight the nuances involved.

First, let’s acknowledge the statutory framework. The Truth-in-Lending Act (TILA) and its implementing Regulation Z require creditors to disclose various charges for residential mortgage loans, including the finance charge and the aggregate amount of fees paid to the mortgage originator in connection with the loan, the amount of those fees directly paid by the consumer, and any additional amount received by the originator from the creditor. So, compliance with this requirement means the rate lock fee disclosure should encompass a reliable response to the information requirements.

But, to give you a sense of the nuances, let’s now turn to case law. Here is but one example. A federal district court in California recently considered a borrower’s claim that TILA required more detail than the creditor had provided him regarding a rate lock fee. The case I will briefly discuss is Muniz v. Wells Fargo [Muniz v. Wells Fargo & Co., 2018 U.S. Dist. (N.D. Cal. May 14, 2018)].

Muniz found a home and applied for a mortgage loan with Wells Fargo. Wells Fargo provided a Loan Estimate that quoted an interest rate of 5.875% with a rate lock by which it “commit[ed] to fund [Muniz’s] loan at [the] stated interest rate if the home purchase and loan close[d]” by August 7, 2017.

The rate lock agreement stated:

“This pricing is valid until the Expiration Date of Rate Lock shown above. If loan does not close and funds disbursed on or before the expiration date, your loan will be re-priced and this may result in pricing increases. However, at the option of [Wells Fargo], you may be permitted to keep your rate the same by paying an extension fee to extend the rate lock.”

Muniz claimed that he diligently provided all the information the bank requested, but the process was allegedly fraught with delays caused by the bank, such as communications issues between the bank and an appraiser who apparently was out of the country.

On August 8, 2017, the day the rate lock expired, the bank issued an updated Closing Disclosure that included a $287.50 fee for “Borrower Paid Rate Lock Extension,” which Muniz paid.

Here’s where the situation broke into the realm of litigation.

Muniz sued, asserting that Wells Fargo had violated TILA by failing to disclose it “would charge borrowers finance charges/fees to extend the rate lock period in cases of bank-caused delay.” His complaint contained information showing that Wells Fargo had disclosed the existence and amount of the rate lock extension fee, including a screenshot of closing documents showing a $287.50 charge for “Rate Lock Extension” and disclosing that “at the option of [Wells Fargo], you may be permitted to keep your rate the same by paying an extension fee.” Muniz’s complaint centered on his view that he had read the disclosure to impose an extension fee only if his actions caused a delay, not if the bank’s own behavior postponed closing.

But the court dismissed the claim, holding that TILA required nothing more in the way of disclosure. The disclosure was consistent with language contained in sample forms published by the CFPB as part of Regulation Z, the use of which sufficed to satisfy TILA’s disclosure requirements, notwithstanding that Muniz pointed to a 9th Circuit opinion which had stated that a meaningful disclosure must “anticipat[e] any reasonable questions which consumers might have.” However, the court referred to the model “Credit Sale Sample” form in Regulation Z, Appendix H-10, which required “nothing more than numerical disclosures for ‘Finance Charge’ and ‘Total of Payments.’” Thus, the court found Muniz's reliance to be misplaced.

Why did the court not accept the theory that the disclosure must “anticipate” any reasonable questions from the consumer? Because, read in context, there is no mandate to extrapolate to a generalized proposition that disclosures beyond those identified in TILA are required, but rather that the required disclosures must be clearly expressed.

Jonathan Foxx, PhD, MBA

Managing Director

Lenders Compliance Group

TRID 2.0: Determining Accuracy of “Total of Payments”

QUESTION

The 2017 amendments (“TRID 2.0”) to the TILA-RESPA Integrated Disclosure Rule (“TRID”) include tolerances for the “Total of Payments” calculation on the Closing Disclosure (“CD”), which mirror the tolerances applicable to determining the accuracy of the Finance Charge. It is unclear to me what I should be comparing the “Total of Payments” to in order to determine accuracy. On the Loan Estimate (“LE”), the total of payments is based on five years as opposed to amortization over the life of the loan as it is on the CD. So, for the purpose of calculating tolerance, should we be running a five year test with respect to the CD and comparing that calculation to the “In 5 Years” calculation on the LE? 

ANSWER

In discussing statutory tolerances for Total of Payments, you need to distinguish between the 1026.19(e)(3) good faith analysis for closing costs and the separate and independent statutory tolerances afforded for the accuracy of the Total of Payments disclosure, similar to those provided for the Finance Charge calculation. There is no comparison between the “In 5 Years” section on the LE to the “Total of Payments” section on the CD. In fact, analyzing the proposed amendment, the Consumer Financial Protection Bureau (the “Bureau”) noted that the two calculations do not include the same information, as the information available to the creditor at the time the CD issues differs from that available at the time the LE issued. [Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act, Section by Section Analysis, p. 352] Rather, the tolerances with respect to the Total of Payments relate to the accuracy of the calculation. 

The Bureau revised § 1026.38(o)(1) to specifically provide that “the disclosed total of payments shall be treated as accurate if the amount disclosed as the total of payments: (i) is understated by no more than $100; or (ii) is greater than the amount required to be disclosed”. [Ibid. at 346]

One of the driving forces behind the amendment was the statutory consequences for misdisclosing the Total of Payments. A misdisclosure of the Total of Payments can give rise to civil liability which may result in an award of actual damages, statutory damages (individual and class action), costs and attorney’s fees. [15 U.S.C. § 1640] Moreover, a misdisclosure of the Total of Payments can result in an extended right of rescission, which generally runs for three years after the date of consummation of the transaction, and if exercised, terminates the creditor’s security interest in the property and eliminates the consumer’s obligation to pay any finance charge (even if already accrued) or any other costs incident to the loan. [Ibid. at 350; See also 12 C.F.R. § 1026.23]

The Truth in Lending Act authorizes the Bureau to “adopt tolerances necessary to facilitate compliance with the statute, provided such tolerances are narrow enough to prevent misleading disclosures or disclosures that circumvent the purposes of the statute”. In its analysis, the Bureau stated its belief that the Total of Payments accuracy tolerances, which are identical to the finance charge tolerances, “are sufficiently narrow to prevent these tolerances from resulting in misleading disclosures or disclosures that circumvent the purposes of TILA”. [Ibid. at 352-353]

One further note, several trade groups supported the clarification regarding tolerances for the accuracy of the Total of Payments disclosure, stating that the approach will “positively impact secondary market execution by affording investors comfort that minor inaccuracies do not raise liability concerns”. [Ibid. at 346]

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Disclosing State Imposed Fee

QUESTION

We lend in the state of South Dakota which, by law, requires a survey. The requirement for a survey is not a lender requirement; rather, it is imposed by state law. That being said, we are unclear as to how the survey fee should be disclosed on the Loan Estimate and Closing Disclosure.

ANSWER

The fee should go in Section H, “Other Costs,” as it is not for a service the lender requires in connection with its decision to make the loan, but rather it is for a service required by the government. 

Typically, we see survey fees disclosed in Section C, “Services You Can Shop For.” That section includes services that “the creditor requires in connection with its decision to make the loan; that would be provided by persons other than the creditor or mortgage broker; and for which the creditor allows the consumer to shop in accordance with §1026.19(e)(1)(vi).” [Official Commentary 37(f)(3)-1 (emphasis added)] 

As the survey fee is not required by you as the lender in connection with your decision to make the loan, it does not belong in Section C. So, if not in Section C, where does it belong?

Section H, “Other Costs,” includes those services which are “ancillary to the creditor’s decision to evaluate the collateral and the consumer for the loan.” Included among these costs are amounts disclosed for items “established by government action” as well as those “based on an obligation incurred by the consumer independently of any requirement imposed by the creditor.” The creditor cannot retain any portion of the disclosed other cost.” [Official Commentary 37(g)-1] 

Thus, as the requirement for a survey has been imposed by state law and no portion of the fee is being retained by you as the lender, Section H is the appropriate place to disclose the fee.

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Construction-Permanent Loan – Disclosing Increase in Payment

QUESTION

With respect to a construction-permanent loan, with respect to the Loan Estimate and Closing Disclosure, under “Loan Terms”, with respect to the monthly principal and interest payment, how should a creditor respond to the statement “Can this amount increase after closing"? 

ANSWER

If, during the construction period, interest is payable only on the amount advanced for the time it is outstanding, the creditor should disclose “YES” in response to the question “Can this amount increase after closing?”  

Discussion

Effective October 10, 2017, the Bureau adopted Amendment to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (the “Final Rule”).  [82 Fed Reg 37656]   A creditor may use the methods set forth in Regulation Z, Appendix D to estimate interest and make disclosures for construction loans if the actual schedule of advances is not known.   

The proposed rule initially addressed the “Can this amount increase after closing” disclosure in the context of a separately disclosed fixed rate construction loan. In the Section by Section analysis, the Bureau acknowledges that using those methods for the calculation of the periodic payments in a fixed-rate construction loan results in interest-only periodic payments that are equal in amount. 

The preamble of the proposed rule explained that “although the actual interest-only payments will increase over the term of the construction financing as the amounts advanced increase, because the methods provided by appendix D to estimate interest may be used to make disclosures, a technically correct and compliant answer to “Can this amount increase after closing?” is “NO.” 

The periodic payments for fixed-rate construction financing, as calculated under appendix D, do not increase but are equal.” The Bureau discussed creditor’s concerns over providing a “NO” answer as the disclosure may not reflect the actual increase in payments that will occur during the construction financing.  

Thus, the Bureau initially proposed adopting a comment to Appendix D which gave the creditor an option of answering “YES”, although a technically correct answer is “NO” and stated that the “proposed comment is consistent with informal guidance provided by the Bureau”.

Ultimately, the Bureau declined to adopt the proposed rule giving the creditor an option to answer either “YES” or “NO” to the question “Can this amount increase after closing?”. Rather, the Final Rule only permits a disclosure of “YES” in response to the question “Can this amount increase after closing?” in instances where there will be an increase in the periodic payment when the amounts or timing of advances is unknown at or before consummation and the Appendix D assumption that applies if interest is payable only on the amount advanced for the time it is outstanding is used to calculate the periodic payment.  The Bureau noted that this change addresses the concern that the disclosure should reflect the fact that the payments actually increase over the term of the construction financing, even though the amount of such increase is not known at or before consummation. 

With respect to separate disclosures for fixed rate construction loans, the Bureau stated that during the optional compliance period before October 1, 2018, a creditor may continue to disclose “NO” based on the informal guidance by the Bureau discussed above.

In an effort to provide further clarify and simplify the disclosures and their implementation, the Bureau stated that the scope of the new comments to Appendix D, is not limited to circumstances when separate disclosures are provided for fixed rate construction financing as they were in the proposed rule. 

The Bureau stated, “as a practical matter, if “YES” is the answer to “Can this amount increase after closing?” when separate disclosures are provided for either fixed-rate or adjustable-rate construction financing, “YES” will necessarily be the answer when a combined disclosure for that financing is provided.  This is generally the result whenever a combined disclosure is used because the interest-only payment of the construction financing increases to the principle and interest payment of the permanent financing. Comment app. D-7.v therefore applies to both separate construction disclosures and combined construction-permanent disclosures because, in either case, the § 1026.37(b)(6) disclosures would reflect the construction phase during which there may be an increase in the periodic payment.”

[Emphasis added.]

For Section by Section analysis, see 82 Fed. Reg. 37758-37760. The Amendment to Appendix D-7 is set forth below.

Amendment to Appendix D-7

iv. Increase in periodic payment. If the amounts or timing of advances is unknown at or before consummation and the appendix D assumption that applies if interest is payable only on the amount advanced for the time it is outstanding is used to calculate the periodic payment: 

A. A creditor discloses “YES” as the answer to “Can this amount increase after closing?” pursuant to § 1026.37(b)(6)(iii) whether the creditor provides separate construction disclosures or combined construction-permanent disclosures, even though calculation of the construction financing periodic payments using the assumptions in appendix D produces interest-only periodic payments that are equal in amount.

B. A creditor that discloses “YES” as the answer to “Can this amount increase after closing?” pursuant to § 1026.37(b)(6)(iii) may use months or years for the § 1026.37(b)(6)(iii) disclosures, consistent with comment 37(b)(6)-1.  For example, for a 10-month construction loan, the first § 1026.37(b)(6)(iii) disclosure bullet may disclose, “Adjusts every mo. starting in mo. 1” and the second § 1026.37(b)(6)(iii) disclosure bullet may disclose, “Can go as high as $[insert maximum possible periodic principal and interest payment] in year 1”.  The calculation of the maximum possible periodic principal and interest payment disclosed is based on the maximum principal balance that could be outstanding during the construction phase.  As part of the “First Change/Amount” disclosure in the “Adjustable Payment (AP) Table” pursuant to § 1026.37(i)(5)(i), the creditor may omit and leave blank the amount or range corresponding to the first periodic principal and interest payment that may change.  In such cases, the creditor must still disclose the timing of the first change, which is the number of the earliest possible payment (e.g., 1st payment) that may change under the terms of the legal obligation.  

C. When separate construction disclosures or the combined construction-permanent disclosures are provided for adjustable-rate construction financing, a creditor provides the § 1026.37(b)(6)(iii) disclosures reflecting changes that are due to changes in the interest rate and changes that are due to changes in the total amount advanced.  Such a creditor discloses “YES” as the answer to “Can this amount increase after closing?” pursuant  to § 1026.37(b)(6), because the initial periodic payment may increase based upon an increase in the interest rate in addition to a change based on the total amount advanced.  Such a creditor also discloses a reference to the adjustable payment table required by § 1026.37(i), disclosed as provided in comment app. D7.iv.B, because that disclosure reflects both a change due to a change in the total amount advanced, which is a change to the periodic principal and interest payment that is not based on an adjustment to the interest rate, as well as the fact that there are interest-only payments.  Such a creditor also includes a reference to the adjustable interest rate table required by § 1026.37(j) because that disclosure reflects a change due to a change in the interest rate.

Joyce Wilkins Pollison, Esq.

Director/Legal & Regulatory Compliance

Lenders Compliance Group