Updated August 15, 2017
By: Timothy A. Raty, Regulatory Compliance Specialist
Not all of the changes under the so-called “TILA-RESPA Integrated Disclosure Requirements” (“TRID”) taking effect next August affect the content of Federal disclosures. One drastic change has been to the “tolerances” for fees which are more expensive to the borrower at closing than they were originally estimated to be.
Current RESPA Tolerances
Under Regulation X, there are three tolerance categories:
- Charges That Cannot Increase
- Charges That Cannot Increase More Than 10%
- Charges That Can Change
“Charges That Cannot Increase” include origination charges, transfer taxes, and the credit or charge for the interest rate chosen and adjusted origination charges (while the interest rate is locked).
“Charges That Cannot Increase More Than 10%” include lender-required settlement services (where the lender selects the provider), lender-required services, title services and required title insurance, and owner’s title insurance (when the provider for any of these three is selected by the borrower from a list provided by the loan originator), and government recording charges.
“Charges That Can Change” include charges for all other settlement services (see 12 CFR § 1024.7[e]).
Two things are worthy of note under the current rules, when comparing it to the new rules. The first is that HUD (who originally imposed these tolerances) did so from the approach that all charges are subject to increase, with some exceptions. The “Charges That Can Change” category, therefore, is a “catch-all net” for any fees not specifically excepted.
The second thing is that HUD does provide guidance concerning how to apply these tolerances to each section of fees on the GFE and HUD-1 (“section fees”). The instructions for filling out the “Comparison Tables” on page 3 of the HUD-1 categorize section fees into each tolerance category as follows (note: only the HUD line numbers which correspond with the GFE block numbers are listed):
- “Charges That Cannot Increase” include:
o GFE Block 1/HUD-1 Line 801 fees;
o GFE Block 2/HUD-1 Line 802 fees;
o GFE Line A/HUD-1 Line 803 fees; and
o GFE Block 8/HUD-1 Line 1203 fees.
- “Charges That Cannot Increase More Than 10%” include:
o GFE Block 3/HUD-1 Lines 804-807 & 902 fees;
o GFE Block 7/HUD-1 Line 1201fees;
o The following fees, if the service provider was selected by the lender or if the borrower selected the provider from a written list of providers given to him by the loan originator:
- GFE Block 4/HUD-1 Line 1101 fees;
- GFE Block 5/HUD-1 Line 1103 fees; and
- GFE Block 6/HUD-1 Line 1301 fees.
- “Charges That Can Change” include:
o GFE Block 9/HUD-1 Line 1001 fees;
o GFE Block 10/HUD-1 Line 901 fees;
o GFE Block 11/HUD-1 Line 903 fees;
o The following fees, if the borrower selected a provider other than one identified by the loan originator:
- GFE Block 4/HUD-1 Line 1101 fees;
- GFE Block 5/HUD-1 Line 1103 fees; and
- GFE Block 6/HUD-1 Line 1301 fees.
New “Tolerances”
Under the TRID, the “tolerance” categories are no longer referred to as “tolerances” by the CFPB. Rather, creditors must make a “good faith determination” as to whether the amount of the fees originally disclosed on the Loan Estimate were done in “good faith” or not (see 12 CFR § 1026.19[e][3][i]). There are three different rules or “tolerances” which are applied in determining whether a fee was originally disclosed in “good faith” or not:
- “Zero Tolerance” – the amount of the fee cannot increase over the amount disclosed on the Loan Estimate.
- “10% Cumulative Tolerance” – the aggregate amount of fees subject to this category cannot increase by more than 10%.
- “`Good Faith’ Limitation” – the amount of the fee can increase by any amount, but the originally disclosed fee must have been made in “good faith” based on information reasonably available to the loan originator.
One of the striking features of these new “good faith determination categories” (which I’ll refer to simply as “Tolerances”) is that, unlike the approach HUD took where fees can increase, with certain exceptions, the CFPB is taking an approach where fees cannot increase, with certain exceptions. Unless otherwise excepted, fees are subject to Zero Tolerance (see Ibid. § 1026.19[e][3][i]).
New “Tolerance Categories”
Fees are subject to the 10% Cumulative Tolerance if:
- It is a recording fee; or
- Is for a third-party service, in which:
o The charge is not paid to and retained by the creditor or an affiliate of the creditor;
o The consumer is permitted to shop for the third-party service provider; and
o The consumer either selects the provider from the “Written List of Providers” or he does not select the provider (i.e. he allows the creditor to select the provider).[1]
Fees are subject to the “Good Faith” Limitation if:
- It is for prepaid interest, property insurance premiums, or will be escrowed;
- Is for a third-party settlement service in which:
o The consumer is permitted to shop for the third-party service provider; and
o The consumer selects a provider who was not on the “Written List of Providers”; or
- Is paid for a third-party service which is not required by the creditor.
All other fees are subject to Zero Tolerance.
Section Fees on the Loan Estimate/Closing Disclosure and Tolerances
Another striking feature is the fact that unlike HUD, the CFPB has not provided any additional guidance as to which fees in which sections of the “Closing Cost Details” sections on the Loan Estimate and Closing Disclosure are subject to which Tolerance, leaving creditors and their vendors with the burden of making this determination.
To add additional weight to the burden, such a determination is not an easy task. A fee must go through several different tests or “filters” to determine categorization:
- Is the fee one of the “specific fees” (i.e. fees which the CFPB specifically places into a particular category)?[2]
- If the fee is not a “specific fee,” who is the fee being paid to and retained by?
- Is the fee for a service which is required by the creditor?
- If the fee is required by the creditor, can the borrower shop for the service provider?
- If the borrower can shop for the service provider, did he select the provider from a written list of service providers? Did he select a provider who was not on the list? Did the lender select the provider, after the borrower declined to choose one?
Based on these factors, it is no longer possible to simply categorize sections of fees into Tolerances. It is quite possible for sections of the disclosures to contain fees which are subject to any one of the three Tolerances.
According to our analysis, there are only two sections of the Loan Estimate and Closing Disclosure which would contain fees subject to the same Tolerance: Section A (Origination Charges) and Section G (Initial Escrow Payment at Closing). Section A is subject to Zero Tolerance[3] while Section G is subject to a “Good Faith” Limitation.[4] In addition, lender credits listed in Section J are also subject to Zero Tolerance without exception.[5]
Section E (Taxes and Other Government Fees) contain only two types of fees: (a) Recording Fees and Other Taxes; and (b) Transfer Taxes. Recording Fees are subject to the 10% Cumulative Tolerance,[6] while Transfer Taxes are subject to Zero Tolerance.[7] “Other Taxes” include “any charges or fees imposed by a State or local government that are not transfer taxes” (12 CFR Pt. 1026, Supp. I, Paragraph 37[g][1] – [2]). Because “Other Taxes” does not match the criteria set forth for the exceptions to Zero Tolerance, these are also subject to Zero Tolerance.[8]
Section F (Prepaids) consist of four types of fees (homeowner’s insurance premiums, mortgage insurance premiums, prepaid interest, and property taxes), plus additional items which will be prepaid by the consumer. Prepaid interest, homeowner’s insurance, and other types of property insurances are “specific fees” which are subject to the “Good Faith” Limitation.[9] In addition, prepaid items for third party services which are not required (which can be paid to an affiliate of the creditor or of the broker) are also subject to this Limitation.[10]
Property taxes are not considered to be a “specific fee” and do not fit into any of the other exceptions, so they are subject to Zero Tolerance.[11] Mortgage Insurance Premiums and other prepaid items which are required by the creditor are also subject to Zero Tolerance.[12]
In addition, if the prepaid item is not considered a “specific fee” and is to be paid to the creditor or the broker, these are also subject to Zero Tolerance, regardless of whether the item is required or not.[13]
Section H (Other)[14] contains fees which can be either in the Zero Tolerance or “Good Faith” Limitation categories based on two criteria. If the fee is paid to the creditor or broker, it is subject to Zero Tolerance.[15] If it is not paid to the creditor or broker, then it is subject to the “Good Faith” Limitation.[16]
Please note that the 10% Cumulative Tolerance category does not apply to Section H fees. The reason for this is because this category applies to a third-party service which is required by the creditor[17] and fees disclosed in Section H are not required by the creditor[18] – albeit they may be required by another party (e.g. the real estate broker).
The most complicated sections are Section B & C. Both of these sections contain “settlement services . . . that are provided by persons other than the creditor or mortgage broker” (12 CFR § 1026.37[f][2] & [3]). These settlement services are considered to be required by the creditor, so the “filter” concerning whether a fee is required or not is irrelevant.[19]
Under Section C (Services You Can Shop For), in which the providers for the services are “shoppable,” fees can be in either one of the three Tolerances. Fees which are paid to an affiliate of the creditor are subject to Zero Tolerance, since any fee under Section C is required.[20]
A fee would be subject to the 10% Cumulative Tolerance if the borrower either does not select the provider (i.e. he is allowed to select the provider, but elects not to and allows the creditor to select the provider) or chooses a provider on the “Written List of Providers.”[21] If the fee is paid to an affiliate of the broker, it is still subject to the 10% Cumulative Tolerance.[22]
If the borrower selects a service provider who is not listed on the “Written List of Providers,” the fee payable to such provider is subject to the “Good Faith” Limitation.[23]
Section B (Services You Cannot Shop For) fees, since they are for required third-party settlement services, are subject to Zero Tolerance. The one exception, however, are for fees which were originally disclosed in Section C of the Loan Estimate, which are disclosed under Section B of the Closing Disclosure. These fees are ones in which the borrower selected the service provider from the “Written List of Providers” and are subject to the 10% Cumulative Tolerance.[24]
Remaining Questions
One puzzling aspect of the TRID is how to categorize owner’s title insurance premiums. These premiums are listed in Section H and, as such, would be considered optional (if they were required, they would be listed in either Sections B or C) and subject to the “Good Faith” Limitation. However the CFPB’s analysis states the following:
“Under the proposal, fees for lender-required services for which a creditor permits the consumer to choose the provider and the consumer selects a settlement service provider identified by the creditor would remain in the ten percent tolerance category. Recording fees and owner’s title insurance would also stay in the ten percent tolerance category . . .
The Bureau does not believe that charges related to owner’s title insurance should be included in the charges not subject to tolerances. Under current Regulation X, such fees are subject to the ten percent tolerance rule. The Bureau believes that changing the current rule weakens consumer protection . . .
With respect to the question whether proposed § 1026.19(e)(3)(iii) [‘Good Faith’ Limitation] would have included fees paid to lender affiliates for an optional settlement service, charges for third-party services not required by the creditor (other than owner’s title insurance) are not subject to a tolerance category, even if a lender affiliate provides them.” (78 FR 79817, 79828, & 79829 [2013])
This is at odds with the structure of the final regulation and further clarification is needed from the CFPB on this matter. In addition, their analysis concerning escrowed items conflicts with the regulation. The analysis states the following:
“The final rule also mirrors current Regulation X in that property insurance premiums, property taxes, homeowner’s association dues, condominium fees, and cooperative fees are subject to tolerances whether or not they are placed into an escrow, impound, reserve, or similar account.” (Ibid. 79829 [2013])
While the actual regulation states this:
“An estimate of the following charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount paid by the consumer exceeds the amount disclosed under paragraph (e)(1)(i) [Zero Tolerance] of this section:
C. Amounts placed into an escrow, impound, reserve, or similar account.” (12 CFR § 1026.19[e][3][iii])
The Official Staff Commentaries do not provide any additional guidance which would reconcile this discrepancy, which lends to a conclusion that either the analysis or the final regulation are in conflict with the intent of the Bureau – and, for workers in this industry’s sake, hopefully it is the former.
Footnotes:
[1] Note that because the second and third criteria incorporate the “Written List of Providers,” the third-party service must be one which is required by the creditor. The shopping for the provider must be consistent with Subsection 19(e)(1)(vi) (see 12 CFR § 1026.19[e][3][ii][C]), the Official Staff Commentaries to which state that the settlement service providers on the Written List “must correspond to the settlement services for which the consumer may shop” (12 CFR Pt. 1026, Supp. I, Paragraph 19[e][1][vi] – [3]) as disclosed in Section (C) of the Loan Estimate, the fees in which section must be required (see Ibid. Paragraph 37[f][3] – [1]). In addition, the Official Staff Commentary to the 10% Cumulative Tolerance rule also alludes to the fact that the service must be required by the creditor. See Ibid. Paragraph 19[e][3][ii] – [3] for details.
Note also that the regulation makes reference to “third party services” and “settlement services” which, if distinct from each other, would lead to different conclusions. However, according to the CFPB, “settlement services” are not defined under TILA, but that the disclosures should “include all charges imposed in connection with the mortgage loan.” (see 78 FR 79817 [2013] & 77 FR 51166 [2012])
[2] These fees are: transfer taxes, recording taxes, prepaid interest, property insurance premiums, escrowed fees, and lender credits.
[3] Section A contains fees “that the consumer will pay to each creditor and loan originator for originating and extending the credit.” (12 CFR § 1026.37[f][1]). Fees paid to the creditor or to a mortgage broker are subject to Zero Tolerance (see 12 CFR Pt. 1026, Supp. I, Paragraph 19[e][3][i] – [1]).
[4] “Amounts placed into an escrow, impound, reserve, or similar account” are subject to a “Good Faith” Limitation (see 12 CFR § 1026.19[e][3][iii][C]), though see the last section of this article for details concerning a possible exception.
[5] See 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(3)(i) – (5) & (6). Note that a decrease in the amount of credit is considered to be an increase to the costs to the borrower and will not be considered to be disclosed in “good faith.”
[6] See 12 CFR § 1026.19(e)(3)(ii)
[7] See 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(3)(i) – (1)(v)
[8] “Other Taxes” are not one of the “specific fees” and the other exceptions apply to charges for third-party services. While an argument could be made that taxes are being paid to a third-party, the CFPB is holding, at least in the case of recording fees, that these are “not charges for third-party services because recording fees are paid to the applicable government entity where the documents related to the mortgage transaction are recorded, and thus, the condition specified in § 1026.19(e)(3)(ii)(B) that the charge for third-party service not be paid to an affiliate of the creditor is inapplicable for recording fees.” (12 CFR Pt. 1026, Supp. I, Paragraph 19[e][3][ii] – [4]). There is no reason why this line of reasoning would not apply to other taxes; therefore our conclusion is that “Other Taxes” are not paid to a third party and are not subject to any of the exceptions.
[9] See 12 CFR § 1026.19(e)(3)(iii)(A) & (B)
[10] See Ibid. § 1026.19(e)(3)(iii)(E). Note that prepaid items are “the amounts to be paid by the consumer in advance of the first scheduled payment” (Ibid. § 1026.37[g][2]) and can, therefore, be charged for third-party services.
[11] See Footnote 8.
[12]Section F would not include settlement services and, while they can be for a third-party service (see Footnote 10), if they are required then the exception for these types of services do not apply under Ibid. § 1026.19(e)(3)(iii)(E).
[13] See Ibid. § 1026.19(e)(3)(iii)(E) & 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(3)(i) – (1)(i) & (ii)
[14] This section contains “an itemization of any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing” (Ibid. § 1026.37[g][4]). Note that the conjunction “or” can allow the clause “the consumer is likely to pay” to include fees to creditors or loan originators (brokers) which are not otherwise disclosed under Section A, which only contain amounts paid to the creditor or broker “for originating and extending the credit.” (Ibid. § 1026.37[f][1])
[15] See 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(3)(i) – (1)(i) & (ii)
[16] See Ibid. § 1026.19(e)(3)(iii)(E)
[17] See Footnote 1
[18] “The items disclosed under proposed § 1026.37[g][4] are not required by the creditor . . . These items are voluntary products that the consumer may be likely or may have already elected to purchase, and of which the creditor knows or is aware.” (77 FR 51216 [2012])
[19] See 12 CFR Pt. 1026, Supp. I, Paragraphs 37(f)(2) – (1) and 37(f)(3) – (1)
[20] See Ibid. § 1026.19(e)(3)(ii)(B) & (e)(3)(iii)(E) and 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(3)(i) – (1)(i) & (ii). Note that the prohibition under the 10% Cumulative Tolerance against a “charge for a third-party service [which] is paid to the creditor or an affiliate of the creditor” would not apply to mortgage brokers, because the definition of “creditor” under Regulation Z is limited to “a person who regularly extends consumer credit . . . and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.” (Supra § 1026.2[a][17][i])
[21] See 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(3)(ii) – (3)
[22] See Footnote 20
[23] See 12 CFR § 1026.19(e)(3)(iii)(D)
[24] See 12 CFR § 1026.38(f)(2) & (f)(3). Keep in mind that there is a distinction between determining the tolerance which applies to a fee and where it is disclosed on the integrated disclosures. Just because a fee moves from one section to another between the Loan Estimate and Closing Disclosure does not mean that the tolerances applicable to such fee changes as well.
Update – August 15, 2017:
Nearly two years from the date that the original TRID rule took effect (on October 3, 2015), amendments to TRID (nicknamed “TRID 2.0”) will take effect (can be implemented on October 10, 2017; mandatory on 1 October, 2018). These amendments modify the Tolerance rules somewhat.
Property Taxes – Section F
We had stated earlier that property taxes disclosed in Section F are subject to Zero Tolerance, since they do not fit into any of the exceptions necessary to make them subject to other Tolerances.
On February 10, 2016, the CFPB published in the Federal Register clarifying language stating that it was their intent for property taxes to be subject to the “Good Faith” Limitation, rather than Zero Tolerance, since the Bureau considers such taxes to be “[c]harges paid for third-party services not required by the creditor.” (81 FR 7032 [2016]) This contrasts sharply with the Bureau’s previous reasoning that recording fees are not charges for third-party services (see Footnote 8), nevertheless, this is the CFPB’s current position. This clarification will be formally integrated into Regulation Z under TRID 2.0 (see 82 FR 37768 [2017]; 12 CFR § 1026.19[e][3][iii][E]).
Note that escrowed amounts for property taxes disclosed in Section G are already subject to the “Good Faith” limitation under 12 CFR § 1026.19(e)(3)(iii)(C).
Fees Paid to the Creditor or an Affiliate of the Creditor – Sections C, F, G, & H
The current structure of the “Good Faith” Determination rule covers prepaid interest, property insurance premiums, escrowed amounts, charges by providers for whom the consumer was permitted to “shop” and not selected on the WLSSP, and charges for non-required items (see 12 CFR § 1026.19[e][3][iii]). However, if any of these charges are paid to the creditor, they are subject to Zero Tolerance (see 12 CFR Pt. 1026, Supp. I, Paragraph 19[e][3][i] – 1.i). In addition, fees paid to an affiliate of the creditor are also subject to Zero Tolerance, unless they are for non-required services (see 12 CFR § 1026.19[e][3][iii][E] and 12 CFR Pt. 1026, Supp. I, Paragraph 19[e][3][i] – 1.iii).
Under TRID 2.0, any fees normally subject to the “Good Faith” Determination are still subject to it, even if they are paid to the creditor or an affiliate of the creditor (see 82 FR 37768 [2017]; 12 CFR § 1026.19[e][3][iii]). Thus, fees in any of the following Sections on the Loan Estimate and Closing Disclosure are covered by the “Good Faith Determination”:
- Section C: Required, but “shoppable” services, the providers for which are selected by the consumer and are not listed on the WLSSP.
- Section F: Prepaid interest, property insurance, and property taxes.
- Section G: Any escrowed amounts.
- Section H: Any non-required fees.
Written List of Settlement Service Providers
One factor for determining whether the 10% Cumulative Tolerance and “Good Faith” Limitation applies to certain fees or not is whether “the creditor permits the consumer to shop for [a] third-party service, consistent with paragraph [12 CFR § 1026.19{e}{1}{vi}]” (Ibid. § 1026.19[e][3][ii][C]; see also Ibid. § 1026.19[e][3][iii][D])
In order to shop “consistent” with Ibid. § 1026.19(e)(1)(vi), the consumer must have been provided with a “Written List of Settlement Service Providers” (“WLSSP”) at the time the Loan Estimate is delivered (see Ibid. § 1026.19[e][1][vi][C]). Questions have been raised to the CFPB about this requirement, such as whether a revised WLSSP needs to be provided with a revised Loan Estimate, whether a consumer has still been permitted to “shop” if a WLSSP was mistakenly not provided with the original Loan Estimate, but was provided shortly after such error was noticed, etc. (see 82 FR 37676 [2017])
The CFPB is amending several provisions regarding the WLSSP, as well as for determining whether the consumer was permitted to “shop” (see 82 FR 37676 through 37680 [2017]). These changes include the following:
- A determination of whether the consumer was permitted to “shop” or not will now be based “on all relevant facts and circumstances,” as determined by the CFPB (see 82 FR 37777 & 37778 [2017]; 12 CFR Pt. 1026, Supp. I, Paragraphs 19[e][1][vi] – 1, 19[e][3][ii] – 6, & 19[e][3][iii] – 2). This provides the CFPB some flexibility in, for example, determining whether a creditor has corrected a bona fide error in providing the WLSSP – albeit it also makes the standard for determining compliance much more subjective.
- In cases where the CFPB determines that the consumer was permitted to “shop” and the consumer chooses a service provider for a service which would not normally be on the creditor’s WLSSP (thus, subject to the “Good Faith” Determination) – yet the creditor does not provide such a WLSSP, the fees assessed by such provider are subject to the 10% Cumulative Tolerance, unless the service provider is the creditor or an affiliate of the creditor, then the fees are subject to Zero Tolerance (see 82 FR 37778 [2017]; 12 CFR Pt. 1026, Supp. I, Paragraph 19[e][3][iii] – 2).