| There is good news coming from Washington for mortgage lending institutions: the CFPB has finalized an amendment to fix what is commonly called the “black hole” problem with the TILA-RESPA Integrated Disclosures regulation. This is something that some institutions may be able to use to reduce good faith tolerance violations and even delays to closings. How this will affect your institution depends on how you’ve interpreted your obligations in the last few years prior to this amendment.
There was a blatant problem area created by the TRID rule where, under certain circumstances, it appeared to be impossible to increase previous estimate of fees paid by a borrower, no matter the reason – even if the borrower requested a different product or something similarly unfair.
Per the regulation, a lender must disclose fees in good faith on the loan estimate. A lender will then disclose its final fees on a closing disclosure, which in no event can be more than what was considered “good faith.” With many fees, so-called good faith actually requires perfection, such that the amount charged cannot exceed the initial estimate by even one dollar. Of course as is reasonable, when things change that were reasonably unexpected, or when a borrower voluntarily requests a change that increases one of the fees previously disclosed, the TRID regulation allowed the initial estimate of fees to be “reset” (i.e. increased) with documentation of a valid purpose along with a revised loan estimate delivered within three days.
This presented a serious problem: Frequently fees increase beyond “good faith” after a closing disclosure has already been issued. The TRID rule outlawed delivery of a loan estimate after a closing disclosure had been issued, and allowed the use of a closing disclosure to rest fees only in very limited circumstances – basically when a new disclosure would be required within four days of closing. Therefore, lenders were stuck in the “black hole” whenever they needed to increase fees during this window of time (more than four days before closing yet after a closing disclosure had already been issued). So how could we reset tolerances? It seemed as though the only option was to refund those excess fees.
Industry Response Until Now
Smart lenders could minimize this problem by waiting to deliver a closing disclosure until as close to closing as possible. A lender that issued a closing disclosure 14 days before the closing date opened a larger “black hole” than a lender that issued a closing disclosure seven days before closing. In fact, if the estimated closing date was always correct, we could effectively make the black hole irrelevant by only issuing the initial closing disclosure close enough to closing. But while this was harmful to productivity and requires Six Sigma-like resources to implement, it still doesn’t completely solve the problem because closings are frequently delayed, often for reasons outside the lender’s control.
So what have lenders done for the past few years when a black hole existed, despite attempts to avoid it?
The most conservative approach was to refund all excess fees. As you can understand, this almost defies reason – what if a borrower requests a change that substantially increases fees in order to lower the interest rate or switch products? But indeed institutions have followed this approach and given out huge amounts of “tolerance credits” – refunds to consumers for amounts in excess of the initial estimates considered to be in good faith. The least conservative approach was to ignore the black hole issue and simply use closing disclosures to reset tolerances whenever necessary.
New Amendment Closes the Black Hole
The new rule is quite simple – it removes the four-day limitation on using a closing disclosure to reset tolerances. A lender can now use the closing disclosure to reset tolerances even when the change needs to occur more than four days before closing.
But the loan estimate should remain the primary tool for revising estimates. Closing disclosures should only be issued when the lender has exercised reasonable due diligence in collecting the information necessary for an accurate disclosure. Put simply, it is called the “closing” disclosure for a reason – it should be delivered close to the time of closing. To do otherwise would violate TRID’s requirement to disclose in “good faith” and may constitute a UDAP violation. The CFPB itself stressed in issuing this amendment that delivering a closing disclosure very early “with terms that are nearly certain to be revised would be contrary to the underlying purpose of the closing disclosure.”
Lenders that have been playing it safe up until this point can use this new amendment to minimize tolerance credits and even avoid some delays to closing. Lenders that adopted an aggressive stance on this issue – along with institutions that weren’t aware of it – have no need to change their process now. The amendment is not retroactive.
Lenders looking for efficiency will be tempted to resort to the practice of issuing the closing disclosure very early in the process and then nullifying the three-day waiting period before closing. But while this absolutely represents an opportunity for a smart lender to gain some efficiency, a lender must still exercise reasonable due diligence in gathering all necessary information before sending the initial closing disclosure. So while this may allow a smart lender to make some modest adjustments, it leaves the general best practice of disclosing an initial closing disclosure 10 days before closing largely intact. Lenders should not see this as clearance to issue a closing disclosure with the commitment letter or rate lock just to get it out of the way sooner.
As with any regulatory change, good compliance advisors should adjust processes to best protect the organization and take advantage of any opportunities.
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. His colleague Zach Regan contributed to this article. Giumarra may be reached at bgiumarra@embracehomeloans.com.
