Can Changed Circumstances Reduce Lender Credits?
Good news in this week's compliance newsletter!
So we've been seeing an issue since TRID loans started closing where lenders may be absorbing costs unnecessarily. Often arising with No-Cost loans, the issue is what to do when lender credits decrease.
Scenario
Lender runs a program where it pays for the cost of the closing attorney. The closing agent fee is listed as $1,075 on the Loan Estimate and a credit of $1,075 is disclosed (as it should be). But the closing agent actually comes in lower and only charges $1,000.
Question
Now we need to adjust the closing agent fee down to $1,000, but are we allowed to reduce the lender credit? Are we correct that lender credits are a 0% tolerance fee and cannot be reduced? In other words, are we stuck paying the $75 here?
The Problem (and reason for newsletter)
Some people think yes, that lender credits are subject to 0% tolerance and cannot be reduced. They would require us to absorb the $75 difference in this example. The problem is that there is a good comment from the CFPB that is just being misinterpreted.
The comment I'm referring to is 1026.19(e)(3)(i)-5. It basically says this: lender credits are a 0% tolerance fee and gives this example (paraphrased): Where a lender discloses $750 for an appraisal and $750 in lender credits to cover the cost of the appraisal, there is no violation if the cost of the appraisal increases to $900 if the lender credit is also increased. But there is a violation if the appraisal decreases by $50 and the lender credit is also decreased by $50.
Answer: Just Use Changed Circumstance!
The Comment above is good, but it fails to tell us what would happen if there was a valid Changed Circumstance. This can be misleading, because many times there will actually be a valid Changed Circumstance.
So let's take the Comment one step further (using our original example):
Remember that the closing agent fee came in cheaper than expected (by $75). Instead of reducing the closing agent fee and finding some way to give the borrower $75, the lender can avoid paying $75 by (1) documenting this as a Changed Circumstance, and (2) revising the Loan Estimate to reflect a lower lender credit.
And if you don't believe us, or if you can't convince an investor, here's a quote from the CFPB's Preamble to the TRID Rule (pages 348-49):
"With respect to whether a changed circumstance or borrower- requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower- requested change can decrease such credits, provided that all of the requirements of § 1026.19(e)(3)(iv), discussed below, are satisfied."
In Other News:
Heads Up! Seems as though many investors are requiring a second Closing Disclosure that will be signed at closing (in addition to the original CD that the borrower gets 3 days prior to consummation). That's not required by TRID, but instead an investor overlay. Arguably pretty confusing to borrowers - but hey, who am I? Just wanted you to be aware.
Diversity and Inclusion standards developments (remember - this Dodd Frank rule has been effective since June 10, 2015) - basically, Federal regulators will be looking at the diversity practices of regulated entities - for compliance officers out there with a little extra time post-TRID (is it post-TRID or just TRID?) here is the full alert from Ballard Spahr. This is an interesting area of Dodd Frank that hasn't received a lot of attention. Institutions will be assessed based on 5 pillars: (i) Workforce diversity, (ii) Workplace inclusion, (iii) Sustainability, (iv) Minority- and Women- owned businesses, and (v) Diversity practices.
Did you hear about the guy who invented the knock-knock joke? He won the 'no bell' peace prize.
I saw a green shooting star on Friday night - thought I was crazy. Then I read about The Leonid Meteor shower and realized I was not!
They say lions don't lose sleep over the opinions of sheep. But even if you're important enough to consider yourself a lion (too bumptious for me), that doesn't mean you shouldn't worry about the sheep's feelings. Glad to be working with a team of people that care about and take care of each other. In her article in the HBR, Employees Who Feel Love Perform Better, Sigal Barsade makes the argument that employees work better when they feel colleagues care about them. An interesting read, maybe this pushes the premise further than many of us might feel comfortable with (even the author admits being uncomfortable at first). I don't think group hugs will replace pipeline meetings. And I don't think you can fake this. But maybe a good reminder that employing people who take an interest in others, beyond the bottom line, can be healthy for an organization.
"Changing to QM was like changing cars. But TRID is like building new roads."
- Bruce Shultz (paraphrased)
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**These are our opinions. We're not authorized, or willing, to express those of others.**