Ben Giumarra

This is a tip that might save some residential mortgage lenders a few bucks in tolerance credits.  

An issue that’s been coming up and causing debates among the industry, basically since the TILA-RESPA Integrated Disclosures first came out, is when a change in the cost of an appraisal is a legitimate change in circumstances. While the estimated cost of an appraisal fee is subject to zero percent tolerance, a revised disclosure can be used to increase the estimate (and avoid issuing a tolerance credit) if we can support this with a legitimate change in circumstances.

General Example 

Here’s an example – note to readers, this actually happened. 

“My institution says there is never a legitimate reason to increase the cost paid by a consumer of an appraiser. If the appraiser comes in with a higher charge, then our institution has to pay that out-of-pocket every time! For example, on one loan I disclosed the standard $500 for an appraisal down near Duxbury off of Route 3. The appraiser’s bill came back at $750, stating that it was going to cost more because it was an unusual property with no comparables. The property was unusual because it had an actual moat around the house! I wanted to re-disclose a new loan estimate with the higher fee of $750, but my compliance department still insists that our institution has to absorb this cost, that TRID doesn’t allow us to change the fee. 

Is my compliance department right? TRID will never allow us to increase the appraisal fee?  

In this example, could we have increased the fee paid by the borrower?” 

No, your compliance department isn’t correct. But it’s also very easy to take this way too far, so your compliance department might have a very good reason for taking a hardline stance. The question of when TRID permits a lender to pass along higher appraisal costs to a consumer is a factual question. Here are the specifics and some best practices.  

Valid Change in Circumstances 

To increase the appraisal fee above the initial estimate by even a single dollar a lender will need to demonstrate there is a valid change in circumstances because this is a fee subject to zero percent tolerance under the TRID regulation. New information that affects the cost of the appraisal service can be a valid reason, but only if the institution couldn’t have reasonably predicted this at the time of disclosure. In determining what is “reasonable,” it is important to note that the lender is required to exercise reasonable due diligence in gathering information needed for an accurate disclosure.  

So this question now becomes a factual matter. What is reasonable for this institution to know about an appraisal fee when disclosing? If not, we can charge the borrower for the increase.  

This will vary based on the facts, but probably the answer is no, that we could not have reasonably predicted that the borrower had a moat.  

Even in this moat example, here are two examples of when a lender would have to absorb the cost and not have a legitimate change of circumstances:

• Borrower did, in fact, tell the loan officer about this during the application process. 
• The existence of the moat was readily apparent from a free source readily available to the lender (like Zillow).
  

Note that many times a processor or centralized disclosure desk will disclose the loan estimate, not the loan officer who had the initial conversations with the borrower. This cannot be used as an excuse because the TRID requirement refers to anything the lender (as a whole) should have known – it doesn’t help to argue that one department or employee isn’t talking to another.  

Best Practices 

Try to establish standard fees with your appraisal partners where you can estimate fees based on some simple factors. Trying to contact an appraiser for a quote in the three days prior to disclosing the loan estimate would be an inefficient process, both for the institution itself and the appraiser or appraisal management company.  

Each lender should know which general factors will impact an appraisal fee, and these should trigger using a higher fee estimate. These factors may include square footage above certain amount, a water view, home value above certain amount, unusual property type and/or a remote location (or lack of appraisers nearby). 

But to use loan triggers, we’ll need to gather that information somehow. That’s why many lenders have included a quick online property search in their pre-disclosure process and added some custom questions to be completed by the borrower or loan officer in the application.  

A quick search on Zillow may identify some of the factors above. Some additional application questions may fill in some other blanks. Neither may be perfect, but as long as we have this process, we’ll get credit for exercising reasonable due diligence and be better able to avoid tolerance credits if the appraisal fee has to change later. 

Ben Giumarra is an attorney and director of quality assurance at Embrace Home Loans, where he supports direct mortgage lending activities along with Embrace’s partnerships with various financial institution. He may be reached at bgiumarra@embracehomeloans.com.