By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
One of the unique changes made under the “Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z)” (82 FR 37656 [2017]; commonly referred to as “TRID 2.0”) is that creditors will need to disclose the amounts of post-consummation inspection and handling fees with the “Loan Estimate” (LE) and “Closing Disclosure” (CD; both the LE and CD are collectively referred to as “Integrated Disclosures”).
Historically, only fees associated with the costs of a mortgage loan transaction which were paid before or at closing were disclosed on the “Good Faith Estimate” (GFE), HUD-1 Settlement Statement (HUD-1), and Truth-in-Lending Disclosure Statement (“TIL”) previous to the effective date of the “Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)” (78 FR 79730 [2013]; commonly referred to as “TRID” or “TRID 1.0”) regulations on October 3, 2015, as well as afterwards when the GFE, HUD-1, and TIL were replaced by the LE and CD in most transactions.
Thus, TRID 2.0 ventures into new and “uncharted” areas with requiring the disclosure of the amount of post-consummation fees. The Bureau of Consumer Financial Protection’s (“CFPB” or the “Bureau”) rationale for doing so is based on “its belief that disclosing the construction loan inspection and handling fees that are collected after consummation . . . would promote the informed use of credit by giving consumers loan cost information necessary to exercise such informed use, while preserving the accuracy of the total amount determined in the calculating cash to close table that must be provided to the consumer . . .” (82 FR 37695 – 37696 [2017])
Such uniqueness necessarily brings into existence several questions regarding the treatment of these types of fees, such as:
- Where are their amounts disclosed on the Integrated Disclosures?
- How are their amounts disclosed when separate Integrated Disclosures are provided for the construction- and permanent-phases of a construction-to-permanent loan?
- Are these amounts factored into the calculation of other amounts disclosed on the Integrated Disclosures, such as the Annual Percentage Rate (“APR”), Finance Charge, Total of Payments (“TOP”), and Total of Payments In 5 Years (“TP5Y”)?
- How are the “tolerance” rules under 12 CFR § 1026.19(e)(3) applied to them?
Fortunately, the Bureau provides answers to each of these questions.
Where are their amounts disclosed on the LE and CD?
Post-consummation inspection and handling fees are disclosed in connection with the LE as follows:
“A creditor makes the disclosures required by § 1026.37(f) and comment 37(f)-3 for construction loan inspection and handling fees collected after consummation by disclosing the total of such fees under the head ‘Inspection and Handling Fees Collected After Closing’ in an addendum., which may be the addendum pursuant to § 1026.37(f)(6) [for disclosing excess amount in Section C of the LE] or any other addendum or additional page under § 1026.37. See comment 37(o)(1)-1. For purposes of comment 38(f)-2 [corresponding guidance concerning these fees on the CD], the addendum may be any addendum or additional page under § 1026.38. If the actual amount of such fees is not known at the time the disclosures are provided, the disclosures in the addendum are based upon the best information reasonably available to the creditor at the time the disclosure is provided. See comment 19(e)(1)(i)-1. For example, such information could include amounts the creditor has previously charged in similar construction transactions or the amount of estimated inspection and handling fees used by the creditor for purposes of setting the construction loan’s commitment amount.” (12 CFR Pt. 1026, Supp. I, Paragraph 37[f][6] – 3; 82 FR 37783 [2017]; italics in the original)
They are disclosed in connection with the CD as follows:
“Construction loan inspection and handling fees are loan costs associated with the transaction for purposes of § 1028.38(f). For information on how to disclose inspection and handling fees for the staged disbursement of construction loan proceeds if the amount or number of such fees or when they will be collected is not known at or before consummation, see comments 37(f)-3, 37(f)(6)-3, and app. D-7.vii. See § 1026.17(e) and its commentary concerning the effect of subsequent events that cause inaccuracies in disclosures.” (12 CFR Pt. 1026, Supp. I, Paragraph 38[f] -2; 82 FR 37786 – 37787 [2017]; italics in original)
Tying these two guides together is a new Official Staff Comment in 12 CFR Pt. 1026, App. D which states the following (in relevant part):
“Comment 37(f)-3 states that such inspection and handling fees [which includes draw fees] are loan costs associated with the transaction for purposes of § 1026.37(f) and, as such, must be disclosed accurately as part of the Loan Estimate. These fees must also be disclosed accurately as part of the Closing Disclosure. Comment 38(f)-2 refers to explanations under comments 37(f)-3 and 37(f)(6)-3 for making these disclosures. . . . If such fees will be collected after consummation, they are disclosed in a separate addendum . . . Comment 37(f)(6)-3 explains how to disclose inspection and handling fees that will be collected after consummation in an addendum. Under comment 38(f)-2, the same explanation applies to an addendum used for disclosing such fees in the Closing Disclosure. . . .” (12 CFR Pt. 1026, Supp. I, Paragraph App. D-7.vii; 82 FR 37793 [2017])
To summarize, the amounts of post-consummation inspection, draw, and handling fees are disclosed as follows:
- On addenda for the LE and CD. The amounts may either be disclosed in their own addenda or in addenda used for other disclosures (g. disclosing the amount of excess Section C fees for the LE, principal reduction disclosures, etc.);
- They must be disclosed under a heading captioned “Inspection and Handling Fees Collected After Closing”; and
- The total of such fees is required to be disclosed. Nothing under TRID 2.0 prohibits creditors from disclosing an itemization of such fees (so long as the total is disclosed), but such an itemization is not required.
How are their amounts disclosed when separate Integrated Disclosures are provided for the construction- and permanent-phases of a construction-to-permanent loan?
Under 12 CFR § 1026.17(c)(6), “when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction.” A new Official Staff Comment to this subsection states the following (in relevant part):
“When a creditor uses the special rule in § 1026.17(c)(6) to disclose credit extensions as multiple transactions, fees and charges must be allocated for purposes of calculating disclosures. In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions [i.e. separate LEs and CDs are provided for the construction- and permanent-phases], the creditor must allocate to the construction transaction finance charges under § 1026.4 and points and fees under § 1026.32(b)(1) that would not be imposed but for the construction financing. For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase and may not be included in the disclosures for the permanent phase . . .” (12 CFR Pt. 1026, Supp. I, Paragraph 17[c][6] – 5; 82 FR 37775 [2017])
Because inspection, draw, and handling fees are “loan costs uniquely associated with construction transactions” (82 FR 37696 [2017]), they must always be disclosed in connection with the LE and CD for the construction phase.
Are these amounts factored into the calculation of other amounts disclosed on the Integrated Disclosures, such as the Annual Percentage Rate (“APR”), Finance Charge, Total of Payments (“TOP”), and Total of Payments In 5 Years (“TP5Y”)?
The quick answer to this question is “Yes”, per the following (quoted in relevant part):
“Comment 4(a)-1.ii.A provides that inspection and handling fees, including draw fees, for the staged disbursement of construction loan proceeds are part of the finance charge. . . . If such fees will be collected after consummation, that are disclosed in a separate addendum and are not counted for purposes of the calculating cash to close table. . . . Comment 37(l)(1)-1 explains that the amount disclosed under § 1026.37(l)(1)(i) [TP5Y] is the sum of principal, interest, mortgage insurance, and loan costs scheduled to be paid through the end of the 60th month after the due date of the first periodic payment, and that loan costs are those costs disclosed under § 1026.37(f). Construction loan inspection and handling fees are loan costs that must be included in the sum of the ‘In 5 Years’ disclosure under § 1026.37(l)(1) and the ‘Total of Payments’ disclosure under § 1026.38(o)(1) because they are disclosed under § 1026.37(f), even when they are disclosed on an addendum.” (12 CFR Pt. 1026, Supp. I, Paragraph App. D-7.vii; 82 FR 37793 [2017])
To summarize, post-consummation inspection, draw, and handling fees are:
- Considered a finance charge and, as such, are factored into the APR;
- Considered a Loan Cost and, as such, are included in TP5Y and TOP, because these amounts are comprised (in part) of Loan Costs; and
- Not factored into the Calculating Cash to Close calculations, because they are paid after closing.
How are the “tolerance” rules under 12 CFR § 1026.19(e)(3) applied to them?
While not addressed by the Bureau in either the regulatory text or the Official Staff Commentary to Regulation Z, the Bureau does provide guidance on this matter to their analysis to TRID 2.0, as follows:
“The impact of basing the disclosure of inspection and handling fees on the best information reasonably available and taking into account the effect of subsequent events is relevant for responding to the commenter that asked whether anticipated inspection fees in connection with multiple advance construction loan draws are subject to a tolerance if the amount disclosed changes between the Loan Estimate and the Closing Disclosures. These fees are subject to the same tolerance as any other fees disclosed as loan costs depending on the category into which they fall under § 1026.19(e)(3), such as origination charges or fees for a service the consumer can or cannot shop for, regardless of whether they are paid at or before closing and disclosed on the disclosures, or paid after consummation and disclosed on the addendum. Thus, if the fees are collected at or before consummation and are disclosed as ‘Services Borrower Did Not Shop For,’ [Section C] they would be subject to the same tolerance as other amounts under that heading. However, when such fees are to be collected after consummation and disclosed on an addendum based on the best information reasonably available, if a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation, as provided by § 1026.17(e).
To provide an example of how the tolerance requirements would apply, in a case where a creditor does not permit the consumer to shop for the construction inspection service provider, the inspection and handling fees would be in the ‘zero tolerance’ category under section § 1026.19(e)(3)(i). If, at the time a Loan Estimate must be provided, the creditor has only a general sense of the scope and site of the construction (as is often the case), the creditor may disclose a total amount of inspection and handling fees based on the total amount of fees the creditor has previously charged in construction transactions the creditor believes to be similar to the present transaction. The creditor may also disclose a total amount of fees based on the estimate the creditor uses in setting the construction transaction’s commitment amount. In either case, the creditor will likely consider the estimated number of inspections that will be required and the estimated cost of each inspection to arrive at a total, thus using the best information reasonably available. If after the Loan Estimate is provided the creditor discover, for example, that the construction site has features that will require additional work and therefore additional and more complex inspections, the best information reasonably available to the creditor at that time is that the total inspection and handling fees will be greater than initially estimated. In such a case the creditor may issue a revised Loan Estimate pursuant to § 1026.19(e)(3)(iv) to reset the tolerance for the inspection and handling fees.
Further, if after consummation additional topographical features are discovered or weather-related events occur that result in additional or more costly inspections, consistent with § 1026.17(e) there is not a violation when a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures. The example described here would apply both when the inspection and handling fees are disclosed in the loan costs table because they are collected at or before consummation and when such fees are disclosed in a separate addendum because they are collected after consummation.
Therefore, if the inspection and handling fees are in a category of fees that is subject to tolerances and these fees change between the Loan Estimate and the Closing Disclosure without the disclosure of revised estimates that can reset tolerances, the applicable tolerance violation could be present. However, if the fees change after consummation because of subsequent events, as described in § 1026.17(e), where would not be a tolerance violation.” (82 FR 37696 – 37697 [2017])
To summarize:
- Dependent on the facts and circumstances, post-consummation inspection, draw, and handling fees are subject to any of the three “tolerance” levels set forth in 12 CFR § 1026.19(e)(3):
- Zero Tolerance under Ibid. § 1026.19(e)(3)(i), an example of which is when the creditor does not permit the consumer to shop for the provider of these services;
- 10% Cumulative Tolerance under Ibid. § 1026.19(e)(3)(ii), an example of which is when the creditor does permit the consumer to shop and the consumer selects a provider on the Written List of Settlement Servicer Providers (“WLSSP”); and
- “Good Faith” Tolerance under Ibid. § 1026.19(e)(3)(iii), an example of which is when the creditor permits the consumer to shop, the consumer is provided a WLSSP, but the consumer selects a provider who is not listed on the WLSSP.
- If an event occurs at or before consummation which causes the amounts disclosed for these fees to be inaccurate, a tolerance violation may be present, dependent upon which tolerance category the fees are subject to, how much the amount of the fee changes, etc.
- If an event occurs after consummation which causes the amounts disclosed to be inaccurate, there is not a tolerance violation, so long as the amounts were “based on the best information reasonably available” at the time they were disclosed.
One additional question which has arisen since the finalization of TRID 2.0 is how creditors should treat these fees if they permit the consumer to shop for the service provider, since it may not be known until after closing which service provider the consumer selects (i.e. will the consumer select a provider listed on the WLSSP or not, which will solely determine whether the fees are subject to the 10% Cumulative Tolerance or “Good Faith” Tolerance categories). This has not been formally answered by the Bureau, but a conservative, default approach would be to treat such fees as subject to the 10% Cumulative Tolerance category.