On April 26, 2018, the CFPB released a second set of TRID amendments which address when mortgage lenders with a valid reason may pass on increased closing costs to consumers and disclose them on a Closing Disclosure instead of a Loan Estimate. “Specifically, a timing restriction on when the creditor may use a Closing Disclosure to communicate closing cost increases to the consumer could prevent a creditor from charging the consumer for those cost increases despite a valid reason for doing so, such as a changed circumstance or borrower request.
The rule will be effective 30 days after it is published in the Federal Register. The full rule can be found here.
Good Faith and Resetting TRID Tolerances
Regulation Z requires creditors to provide consumers with “good faith” estimates of the loan terms and closing costs required for a loan. These estimates are provided on the Loan Estimate and considered to be in “good faith” if the charge actually paid by the borrower does not exceed the amount of the charges that were originally disclosed, except for a few circumstances found in three sections of Regulation Z: section 1026.19(e)(3)(ii), section 1026.19(e)(3)(iii), and section 1026.19(e)(3)(iv).
The first section of Regulation Z that permits fees to be charged in a different amount than originally disclosed is section 1026.19(e)(3)(ii). This section provides that estimates for certain third-party services and recording fees are considered to be in “good faith” if the total of all applicable charges that are actually paid by (or imposed on) the consumer does not exceed the total of all applicable charges disclosed on the Loan Estimate by more than 10 percent. This section is often referred to as the “10 percent bucket” when calculating the tolerance requirements of the rule to determine if they were assessed in “good faith.” Examples of these fees include fees for appraisals, credit reports, flood determinations, and in some cases, title fees (where the consumer chooses a title company that is a preferred provider of the creditor).
The second section of Regulation Z that allows charges to be assessed in an amount that is different than what was originally disclosed is section 1026.19(e)(3)(iii). This section provides that certain other estimates are disclosed in good faith so long as they are consistent with the best information reasonably available to the creditor at the time they are disclosed, regardless of whether and by how much the amount paid by the consumer exceeds the disclosed estimate.
The final section of Regulation Z that allows fees to be charged in a different amount than what was originally disclosed is section 1026.19(e)(3)(iv). In short, this is the section of Regulation Z that permits creditors to “reset tolerances.” What this means is that, in certain limited circumstances, creditors may use revised estimates of charges (instead of the estimate of charges originally disclosed to the consumer) to compare to the charges actually paid by (or imposed on) the consumer for purposes of determining whether the estimated charges were considered to be in “good faith.” Under this section the circumstances under which creditors may reset tolerances are as follows:
A defined set of changed circumstances that cause estimated charges to increase or, in the case of certain estimated charges, cause the aggregate amount of such charges to increase by more than 10 percent;30
The consumer is ineligible for an estimated charge previously disclosed because of a changed circumstance that affects the consumer’s creditworthiness or the value of the property securing the transaction;
The consumer requests revisions to the credit terms or the settlement that cause an estimated charge to increase;
Points or lender credits change because the interest rate was not locked when the Loan Estimate was provided;
The consumer indicates an intent to proceed with the transaction more than 10 business days, or more than any additional number of days specified by the creditor before the offer expires, after the Loan Estimate was provided to the consumer; and
The loan is a construction loan that is not expected to close until more than 60 days after the Loan Estimate has been provided to the consumer and the creditor clearly and conspicuously states that a revised disclosure may be issued.
The TRID Black Hole for Resetting Tolerances
The original version of TRID had a quirk (referred to as many as a “black hole”) that prohibited creditors from being able to reset tolerances in certain cases, even though it would otherwise be permitted by Regulation Z. Specifically, the original rules required that if a creditor wanted to use a revised Loan Estimate to reset the tolerances used to determine “good faith,” that a revised Loan Estimate must be provided within three business days of receiving information that permitted the tolerances to be reset. This provision became problematic in a few instances when a Closing Disclosure was already issued.
To understand the “black hole” found in the original rules, we must look at two provisions of TRID. First, Regulation Z does not allow a creditor to send a revised Loan Estimate to a consumer once a Closing Disclosure has been provided. This could be problematic for creditors that have a valid changed circumstance that occurs after the Closing Disclosure has been provided. In attempts to remedy this problem, the CFPB included a provision in the original version of TRID known as the “four-business day limit” (which is the second provision we need to look at to understand the “black hole” issue). In short, this provision said that if there are fewer than four business days between the time the time the revised version of the Loan Estimate is required to be provided and consummation, creditors were permitted to reflect the revised disclosures to reset tolerances on the Closing Disclosure instead of the Loan Estimate. While this provision helps in cases where the Closing Disclosure is provided just three days before the planned closing of the loan, it creates a “black hole” for instances where the closing is planned beyond 4 days from the time the Closing Disclosure is issued.
The “black hole” created significant confusion in the market and the “four-business day limit” caused situations where creditors could not provide either a revised Loan Estimate or a Closing Disclosure to reset tolerances - even if a valid reason to reset the tolerances existed and would otherwise have been permitted. For example, the “black hole” could occur if a creditor has already provided the Closing Disclosure and an event occurred (or a consumer requested a change) that caused an increase in the closing costs, but there were four or more days between the time the revised disclosures would need to be provided and the date of loan closing. The “black hole” could also occur if there was a delay in the scheduled closing date of the loan after the initial Closing Disclosure was provided to the consumer.
The bottom line is that a “black hole” occurred in the rules regarding tolerance resets because the original version of TRID did not contain a provision that explicitly provided that creditors may use a Closing Disclosure to reflect the revised estimates if there were four or more business days between consummation and the time the revised disclosures were required to be issued.
Final Rule for Resetting Tolerances With a Closing Disclosure
The final amendments for resetting tolerances do a number of things. First, the final rule removes the “four-business day limit” that appeared to cause the “back hole” in regards to resetting tolerances. In addition to this, the rule clarifies that a Closing Disclosure (initial or revised) can be used to reset tolerances regardless of when the Closing Disclosure is provided to the consumer relative to consummation.
The removal of the “four-business day limit” appears to mean that the CFPB is essentially permitting creditors to provide the Closing Disclosure earlier in the application process. While the preamble to the final rule notes that the CFPB does not like the idea of creditors providing the Closing Disclosure very early in the loan process, the CFPB also states that they believe that “current rules should prevent creditors from sending Closing Disclosures very early in the process before engaging in due diligence to ensure that any costs are not finalized are estimated in good faith.” The referenced existing rules include the provision that creditors act in good faith by exercising due diligence to obtain the best information reasonably available when providing closing costs listed on the Closing Disclosure.
In addition to removing the “four-business day limit,” the final rule clarifies that a revised Closing Disclosure that is used to reset tolerances is not necessarily subject to the three day rule, meaning that a revised Closing Disclosure can be provided one or two days before closing, as long as the initial Closing Disclosure was provided at least three days before consummation and there are not triggering events that require a new three day waiting period. Specifically, final comment 19(e)(4)(ii)-1.iii provides and example and clarifies that a consumer request to change the loan would result in a revised disclosure to reset tolerances, but would not require a new waiting period.
New Examples for Resetting Tolerances With a Closing Disclosure
The final rule also provides several new examples for how a Closing Disclosure can be used to reset tolerances after a Closing Disclosure is provided to the customer. These examples are as follows:
i. If the creditor is scheduled to meet with the consumer and provide the disclosures required by 1026.19(f)(1)(i) on Wednesday, June 3, and the APR becomes inaccurate on Tuesday, June 2, the creditor complies with the requirements of 1026.19(e)(4) by providing the disclosures required under § 1026.19(f)(1)(i) reflecting the revised APR on Wednesday, June 3. However, the creditor does not comply with the requirements of 1026.19(e)(4) if it provides both a revised version of the disclosures required under 1026.19(e)(1)(i) reflecting the revised APR on Wednesday, June 3, and also provides the disclosures required under 1026.19(f)(1)(i) on Wednesday, June 3.
ii. If the creditor is scheduled to email the disclosures required under 1026.19(f)(1)(i) to the consumer on Wednesday, June 3, and the consumer requests a change to the loan that would result in revised disclosures pursuant to 1026.19(e)(3)(iv)(C) on Tuesday, June 2, the creditor complies with the requirements of 1026.19(e)(4) by providing the disclosures required under 1026.19(f)(1)(i) reflecting the consumer-requested changes on Wednesday, June 3. However, the creditor does not comply with the requirements of 1026.19(e)(4) if it provides disclosures reflecting the consumer-requested changes using both the revised version of the disclosures required under 1026.19(e)(1)(i) on Wednesday, June 3, and also the disclosures required under 1026.19(f)(1)(i) on Wednesday, June 3.
iii. Consummation is scheduled for Thursday, June 4. The creditor hand delivers the disclosures required by 1026.19(f)(1)(i) on Monday, June 1, and, on Tuesday, June 2, the consumer requests a change to the loan that would result in revised disclosures pursuant to 1026.19(e)(3)(iv)(C) but would not require a new waiting period pursuant to 1026.19(f)(2)(ii). Under 1026.19(f)(2)(i), the creditor is required to provide corrected disclosures reflecting any changed terms to the consumer so that the consumer receives the corrected disclosures at or before consummation. The creditor complies with the requirements of 1026.19(e)(4) by hand delivering the disclosures required by 1026.19(f)(2)(i) reflecting the consumer-requested changes on Thursday, June 4.
iv. Consummation is originally scheduled for Wednesday, June 10. The creditor hand delivers the disclosures required by 1026.19(f)(1)(i) on Friday, June 5. On Monday, June 8, the consumer reschedules consummation for Wednesday, June 17. Also on Monday, June 8, the consumer requests a rate lock extension that would result in revised disclosures pursuant to 1026.19(e)(3)(iv)(C) but would not require a new waiting period pursuant to 1026.19(f)(2)(ii). The creditor complies with the requirements of 1026.19(e)(4) by delivering or placing in the mail the disclosures required by 1026.19(f)(2)(i) reflecting the consumer-requested changes on Thursday, June 11. Under 1026.19(f)(2)(i), the creditor is required to provide corrected disclosures reflecting any changed terms to the consumer so that the consumer receives the corrected disclosures at or before consummation. The creditor complies with 1026.19(f)(2)(i) by hand delivering the disclosures on Thursday, June 11. Alternatively, the creditor complies with 1026.19(f)(2)(i) by providing the disclosures to the consumer by mail, including by electronic mail, on Thursday, June 11, because the consumer is considered to have received the corrected disclosures on Monday, June 15 (unless the creditor relies on evidence that the consumer received the corrected disclosures earlier). See 1026.19(f)(1)(iii) and comments 19(f)(1)(iii)-1 and -2. See also 1026.38(t)(3) and comment 19(f)(1)(iii)-2 regarding providing the disclosures required by 1026.19(f)(1)(i) (including any corrected disclosures provided under 1026.19(f)(2)(i) or (ii)) in electronic form.
v. Consummation is originally scheduled for Wednesday, June 10. The creditor hand delivers the disclosures required by 1026.19(f)(1)(i) on Friday, June 5, and the APR becomes inaccurate on Monday, June 8, such that the creditor is required to delay consummation and provide corrected disclosures, including any other changed terms, so that the consumer receives them at least three business days before consummation under 1026.19(f)(2)(ii). Consummation is rescheduled for Friday, June 12. The creditor complies with the requirements of 1026.19(e)(4) by hand delivering the disclosures required by 1026.19(f)(2)(ii) reflecting the revised APR and any other changed terms to the consumer on Tuesday, June 9. See 1026.19(f)(2)(ii) and associated commentary regarding changes before consummation requiring a new waiting period. See comment 19(e)(4)(i)-1 for further guidance on when sufficient information has been received to establish an event has occurred.
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