Changing a Lender Credit
Adam uses this Compliance Clip (video) to answer this question: can a lender credit change? Adam takes a pretty deep dive answering this question and gives a background of the original TRID rule, talks about TRID 2.0 and, more importantly, the brand new guidance from the CFPB regarding lender credits.
This FAQ is just one of ten that Adam will be covering in our upcoming Spring 2020 Quarterly Compliance Update - which is a program that will review all regulatory activity (i.e. changes) that took place in the first quarter of 2020. Keep an eye out in our store for our Spring 2020 Quarterly Compliance Update as we plan to release it in mid-to-late April.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about whether a lender credit can change. Specifically, the question we recently received was, “Can lender credits be changed?” So that's the question we're going to discuss.
When TRID 1.0 first came out, the original version of the Truth-In-Lending RESPA Integrated Disclosures Rule under Reg Z, there was a lot of confusion and not too much understanding of what we could do with lender credits. So, the general understanding was that you could not change a lender credit. It was set in stone. Well, when TRID 2.0 came out, that kind of clarified things for us. More recently, the CFPB has given us a little more guidance. Specifically, our answer today is going to come from the new CFPB TRID Frequently Asked Questions, and specifically Frequently Asked Question number 10 under the Lender credits section that the CFPB just released.
We're going to talk about lender credits changing. Let's talk about whether they can be increased and then whether they can be decreased. So, our first question is, can lender credits increase? What the frequently asked questions says, is this, “Regulation Z does not limit a creditor's ability to increase the amount of lender credits disclosed on the Loan Estimate.” In other words, if you want to get more money to the customer, you can do that because it is beneficial to the customer, no problems there. So you can always increase a lender credit. There's no issue with that.
They go on to talk about the concerns of lender credits and why it's a concern. Let's look at this a little bit before we get to the question of whether or not lender credits can decrease. What the frequently asked question says is, “The actual total amount of lender credits, whether it's a specific or general lender credit provided by the creditor that is less than the estimated lender credits disclosed on the Loan Estimate is an increased charge to the consumer for purposes of determining good faith under the TRID rule.” The key here is it's an increased charge. That's how they look at it. It's an increased charge when you change the lender credits. And they say, “Essentially, lender credits are a negative charge to the consumer subject to the good faith requirements of the TRID rule, and must be considered when determining whether disclosures were made in good faith and within applicable tolerance standards.” Really what they're saying is when you take away a lender credit, that's increasing fees to the customer and that's a charge. So, the lender credits a negative charge. When you take the negative charge away, we have a double positive that results in harm to the customer. That's essentially what they're saying here.
Now, they give an example. They say, “For example, if the creditor discloses a $750 estimate for lender credits on the Loan Estimate, but only $500 of lender credits is actually provided to the consumer, the actual amount of lender credits provided is less than the estimated lender credits disclosed on the Loan Estimate, and is therefore an increased charge to the consumer for purposes of determining good faith under 1026.19(e)(3)(i).” Our concern is good faith and what they mean there is the tolerances. So, to determine good faith, if we reduce our lender credit, we're going to be out of tolerance because this is a negative effect to the consumer, and essentially, we would have a reimbursement that we would need to give to correct this. That's where they're going with this.
Our question then is can lender credits decrease? That's really the real question. Of course, it can increase, it's a benefit to the customer. But can they decrease because that's a negative effect to the customer.
They say here in this frequently asked question is, “However, a decrease in the amount of the lender credits disclosed on the Loan Estimate can lead to a violation of the good faith disclosure standards under 12 CFR 1026.19(e)(3),” which is the citation or Reg Z, which is a tolerance violation. They say, “Lender credits may decrease only if there is an accompanying changed circumstance or other triggering event under 1026.19(e)(3)(iv), and the creditor provides the consumer with a revised estimate within three business days of receiving information sufficient to establish that the changed circumstance or other triggering event has occurred.”
The bottom line here is they're saying typically you can not just decrease a lender credit for an arbitrary purpose. However, if you have a changed circumstance or other triggering event that applies just like your regular changed circumstance, then it could decrease. That's what they actually clarify in TRID 2.0. So, it could potentially decrease, but what I'll say to you is your auditors and examiners aren't really used to this yet so you need to document, document, document your changed circumstance and make sure it's a legitimate change circumstance. Not the fact that, “Oh, we don't need as much funds to close,” that's probably not a legitimate changed circumstance. But if something else happened that is a legitimate changed circumstance under the definitions under Reg Z, then you would be okay to potentially decrease that. That's where they're going.
This is a complex topic. I took a little bit of extra time talking about this because this is a topic that just came out of these new TRID Frequently Asked Questions. This is something we're going to discuss in our Spring 2020 Quarterly Compliance Update. These are the types of topics where we take a deep dive into the rules and we cover all the changes that took place from the prior quarter in our quarterly compliance update program. This will be covered in detail, along with the nine other frequently asked questions in our spring 2020 Quarterly Compliance Update, you can find that in our store at www.compliancecohort.com/store. So, if you want more deep dives, just like this on all the rules that recently took place, because this change here took place in the first quarter of 2020, take a look at our store and take a look at our quarterly compliance update program.
We conclude here by the final piece of this frequently asked question. They say, “If a changed circumstance or other triggering event causes a lender credit to decrease, the creditor is not subject to a tolerance violation assuming the other requirements for resetting tolerances are met.” In other words, if you have a legitimate changed circumstance, you can absolutely decrease that lender credit, as long as it's qualified. That's what they're saying, and that's what we can do with changing lender credits. That's all I have for you today in this Compliance Clip.