By: Timothy A. Raty; Sr. Regulatory Compliance Specialist
An issue which has plagued the industry since the original TILA-RESPA Integrated Disclosure rule was finalized (see 78 FR 79730 [2013]) is ambiguity as to which fees should be disclosed on the Loan Estimate (“LE”). Should they only be the fees actually paid by the borrower? Or should they be both the fees actually paid by the borrower, as well as any other fees legally imposed on (but not necessarily paid by) the borrower? Or should all the fees connected with the transaction be disclosed, regardless of whom is paying for them?
Unfortunately, valid arguments can be made for all three methods, which can make it difficult for industry participants to settle on a universal practice. This, in turn, can frustrate one of the main purposes of the LE as a “shopping tool” for consumers to compare loan terms among different creditors. If each creditor is basing their LE’s on different methodologies (borrower-paid, borrower-paid/responsible, or total fees), the consumer will not be able to adequately compare the costs.
Fundamentals of the Loan Estimate
The LE, like all disclosures required in connection with closed end-credit subject to Subpart C of Federal Regulation Z (12 C.F.R. Pt. 1026), must “reflect the terms of the legal obligation between the parties” (Ibid. § 1026.17[c][1]). As further explained by the CFPB:
“The disclosures shall reflect the terms to which the consumer and creditor are legally bound as of the outset of the transaction. . . . The legal obligation is determined by applicable State law or other law. . . .
The legal obligation normally is presumed to be contained in the note or contract that evidences the agreement between the consumer and the creditor. But this presumption is rebutted if another agreement between the consumer and creditor legally modifies that note or contract. If the consumer and creditor informally agree to a modification of the legal obligation, the modification should not be reflected in the disclosures unless it rises to the level of a change in the terms of the legal obligation. . . .” (12 C.F.R. Pt. 1026, Supp. I, Paragraphs 17[c][1] – 1 & 2)
While fundamentally sound, determining which method to use based on this is difficult. Promissory notes usually do not reference closing costs (e.g., see any of Fannie Mae’s uniform promissory notes). Other agreements between the consumer and creditor can (but are not always required to) exist; these can reference some or all fees (e.g., commitment, financing, and lock-in agreements) and who will pay them. However, these types of agreements are usually executed after the consumer is required to receive the initial LE.
In addition, State laws will vary as to what they determine to be the “legal obligation” between the consumer and creditor, particularly in cases where there is no written agreement specifying which party will be paying what fee.
The Case for Only Disclosing Borrower-Paid Fees
The primary argument in favor of disclosing only borrower-paid fees comes from the following language of the Truth-in-Lending Act:
“For each consumer credit transaction other than under an open end credit plan, the creditor shall disclose each of the following items, to the extent applicable: . . .
(17) In the case of a residential mortgage loan, the aggregate amount of settlement charges for all settlement services provided in connection with the loan, the amount of charges that are included in the loan and the amount of such charges the borrower must pay at closing, the approximate amount of the wholesale rate of funds in connection with the loan, and the aggregate amount of other fees or required payments in connection with the loan.
(18) In the case of a residential mortgage loan, the aggregate amount of fees paid to the mortgage originator in connection with the loan, the amount of such fees paid directly by the consumer, and any additional amount received by the originator from the creditor.” (15 U.S.C.A. § 1638[a]; emphases in both this and all subsequent citations are added)
Under Ibid. § 1638(b)(2)(A), these disclosures must “be delivered or placed in the mail not later than three business days after the creditor receives the consumer’s written application, which shall be at least 7 business days before consummation of the transaction”, if the transaction is also subject to the Real Estate Settlement Procedures Act (12 U.S.C.A. §§ 2601 – 2617), thus clearly applying to the LE. Taken altogether, the LE must disclose both: (1) the charges the borrower will pay at closing; and (2) the amount of fees paid “directly” by the consumer.
Thus, an argument can be made that only charges paid by the consumer should be disclosed. Commingling the disclosure of these fees with those paid by others, without any indication as to whom will pay each fee, causes the disclosures under Ibid. § 1638(a)(17) & (18) to not be “clearly and conspicuously” disclosed, as required by TILA (see Ibid. § 1632[a] and 12 C.F.R. § 1026.37[o][1][i]).
In addition to the statutory requirements, the instructions for Sections A through C and F of the LE all make references to disclosing only the costs which the borrower will pay:
“Under the subheading ‘Origination Charges,’ an itemization of each amount, and a subtotal of all such amounts, that the consumer will pay to each creditor and loan originator for originating and extending the credit.” (12 C.F.R. § 1026.37[f][1])
“Under the subheading ‘Services You Cannot Shop For,” an itemization of each amount, and a subtotal of all such amounts, the consumer will pay for settlement services for which the consumer cannot shop . . .” (Ibid. § 1026.37[f][2])
“Under the subheading ‘Services You Can Shop For,’ an itemization of each amount and a subtotal of all such amounts the consumer will pay for settlement services for which the consumer can shop . . .” (Ibid. § 1026.37[f][3])
“Under the subheading ‘Prepaids,’ an itemization of the amounts to be paid by the consumer in advance of the first scheduled payment . . .” (Ibid. § 1026.37[g][2])
The Case for Only Disclosing Borrower-Paid/Responsible Fees
While the language of TILA supports an argument for disclosing only borrower-paid fees (or all fees, as will be covered later), the language of RESPA supports disclosing borrower-paid and borrower-obligated fees on the LE:
“Each lender shall include with the booklet a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement as prescribed by the Bureau. . . .” (12 U.S.C.A. § 2604[c]; see also Ibid. § 2603[a] which ties this requirement with the Integrated Disclosures)
Also, according to the requirements for the LE, “an estimated closing cost disclosed [on the LE] is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed . . . except as otherwise provided . . .” (12 C.F.R. § 1026.19[e][3][i])
The CFPB attempted to clarify this standard in their proposed TRID 2.0 rule, as follows:
“While § 1026.19(e)(3)(i) provides that good faith is determined by whether a closing cost paid by or imposed on the consumer does not exceed the amount originally disclosed on the Loan Estimate, other sections of Regulation Z, including the finance charge definition in § 1026.4(a), are framed in terms of whether the charge is payable by the consumer rather than whether it is paid by or imposed on the consumer. The Bureau regards these standards, ‘paid by or imposed on the consumer’ and ‘payable by the consumer,’ as interchangeable. For example, existing commentary emphasizes that the term ‘payable’ includes charges imposed on the consumer, even if the consumer does not pay for such charges at consummation.[i] Under § 1026.19(e)(3)(i), when a closing cost paid by or imposed on the consumer exceeds the amount disclosed on the Loan Estimate, the amount disclosed on the Loan Estimate was not made in good faith by the creditor. The use of the phrases ‘paid by or imposed on the consumer’ and ‘payable by the consumer’ both reflect the same standard. . . .” (81 FR 54331 [2016])
Unfortunately, the CFPB withdrew the Official Staff Comment which would have provided this clarification, stating that their proposed comment “would increase confusion concerning the use of the phrase ‘paid by or imposed on’ in § 1026.19(e)(3)(i).” (82 FR 37675 [2017]) However, this withdrawal does not indicate that their interpretation of these two standards changed and it is reasonable to assume that it still applies.
As such, a valid argument can be made that, in order for the “good faith” determination standards set forth in 12 C.F.R. § 1026.19(e)(3)(i) to apply, fees that the borrower will pay, as well as fees for which the borrower is legally obligated to pay, must be disclosed on the LE.
Buttressing this argument is a tradition (dating back to at least 2010) of disclosing these borrower-paid/responsible fees on the Good Faith Estimate (“GFE”) required by RESPA. This was established by the following Q&A published by the Department of Housing and Urban Development:
“Q: If at the time a GFE is issued it is known that the seller will pay settlement charges typically paid by the borrower, how are the charges disclosed on the GFE?
A: All charges typically paid by the borrower must be disclosed on the GFE regardless of whether the charges will be paid for by the borrower, the seller, or other party.” (“New RESPA Rule FAQs” p. 13)
Finally, in contrast to the instructions to Sections A through C and F of the LE (as described in the previous section), the instructions to Section H state the following:
“Under the subheading ‘Other,’ 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 and of which the creditor is aware at the time of issuing the Loan Estimate . . .” (12 C.F.R. § 1026.37[g][4])
The Case for Disclosing All Fees
Under TILA, the LE must disclose “the aggregate amount of settlement charges for all settlement services provided in connection with the loan” (see 15 U.S.C.A. § 1638[a][17] & [18], cited previously). The aggregate of such amount is disclosed in Section J, thus requiring by implication that all fees should be disclosed in the “Loan Costs” and “Other Costs” tables (collectively referred to hereinafter as “Closing Costs Details” tables), so that the aggregate accurately reflects the costs of “all” settlement services, regardless of payor.
This conclusion is further supported by the actual instructions for the “Closing Costs Details” tables, which state the following:
“Under the master heading ‘Closing Cost Details,’ in a table under the heading ‘Loan Costs,’ all loan costs associated with the transaction. . . .” (12 C.F.R. § 1026.37[f]; emphasis added)
“Under the master heading ‘Closing Cost Details,’ in a table under the heading ‘Other Costs,’ all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. . . .” (Ibid. § 1026.38(g); emphasis added)
Further supporting this conclusion is the analysis to TRID 1.0, which directly references 15 U.S.C.A. § 1638(a)(17) & (18) within the context of the “Closing Costs Details” tables (e.g., see 78 FR 79951 & 79959 [2013]). The CFPB hinted that all fees should be disclosed in these tables, as follows:
“. . . two national trade associations and some other industry commenters stated that settlement charges that are offset by lender credits or rebates, either from an increased interest rate or as a matter of accommodation, should not be required to be itemized on the Loan Estimate at all. However, section 1419 of the Dodd-Frank Act amended TILA section 128(a) to require, in the case of a residential mortgage loan, disclosure of the aggregate amount of settlement charges for all settlement services provided in connection with the loan and the aggregate amount of other fees or required payments in connection with the loan. 12 U.S.C. 1638(a)(17). If any settlement charges are not included on the Loan Estimate because they are paid from an increased interest rate or from a contractually provided credit or rebate from the creditor, then the aggregate amount of settlement charges for all settlement services provided in connection with the loan would not be disclosed on the Loan Estimate, thereby frustrating the requirement of section 1419 of the Dodd-Frank Act. Eliminating some settlement charges from the Loan Estimate also would reduce the ability of consumers to identify the settlement services that they could shop for, to negotiate the charges, and to compare such services and charges between creditor. See Kleimann Testing Report at 288. The Bureau believes that, to improve consumer understanding of the nature and charges associated with the transaction, consumers should be provided information on the services required by the creditor, and the cost of those services, even if the creditor is providing credits to offset the cost of those required services.” (Ibid. 79952 [2013])
The most poignant analysis provided by the CFPB, however, is in regards to seller credits. A commentator to the proposed TRID 1.0 rule recommended that any specific charges encompassed by a seller credit should be omitted from the LE entirely. The CFPB provided the following rebuttal:
“This, however, would work against the provision of early, accurate information to the consumer of the costs associated with the extension of credit. . . . In addition, section 1419 of the Dodd-Frank Act amended TILA to require that the creditor disclose ‘the aggregate amount of settlement charges for all settlement services provided in connection with the loan . . .’ 15 U.S.C. 1638(a)(17). This requirement is not limited to those charges paid by the consumer, which are subject to separate disclosure pursuant to another clause of that section. In addition, the consumer ultimately would be liable to pay for many of the services if the seller did not provide the credit at closing for some reason, and thus, the Bureau believes the consumer should be provided the information about the required and likely costs of the transaction.” (Ibid. 79968 [2013])[ii]
Analysis
Volumes can be written on this topic, as it involves many different laws, applied in overlapping and sometimes contradictory ways. A simple analysis is that there are three types of disclosures required by both RESPA and TILA to be disclosed on the LE:
- “Charges for specific settlement services the borrower is likely to incur” (12 U.S.C.A. § 2604[c]), otherwise known as borrower-paid/responsible fees;
- The amount of settlement charges “the borrower must pay at closing” or “the amount of such fees paid directly by the consumer” (15 U.S.C.A. § 1638[a][17] & [18]), otherwise known as borrower-paid fees; and
- The “aggregate amount of settlement charges for all settlement services provided” () which, by implication, involves all fees, regardless of payor.
Which of these methods should be used in the “Closing Costs Details” tables is not clear. The overall instructions for the tables support a total-centric approach, the specific instructions for most of the sections in the table support a borrower-paid approach, and the general “good faith determination” rules plus the instructions to Section H of the “Other Costs” table support a borrower-paid/responsible approach.
Since the law is unclear on this matter and reasonable minds can come to different conclusions, we developed a system setting allowing for the support of all three methods. “Amounts to Include on the Loan Estimate (TRID 2.0 Only)” (FI 118883) may be mapped by clients to any of the following options:
- Borrower Paid Amounts
- Borrower Responsible and Paid Amounts
- Estimated Total Amounts
- Imported Amounts
If this field is not mapped, our default setting is “Borrower Responsible and Paid Amounts”, as this appears to be the most widely used method in the industry.
____________________________________________
[i] “See, e.g., comments 4(a)-2, 4(a)-4.ii.C, 4(a)-5, 4(a)(2)-2, 4(c)(2)-1.i, 4(c)(7)-1 and -2, and 32(b)1-1.i and -2.i.” (81 FR 54331 [2016], Footnote 63)
[ii] Under TRID 2.0, the CFPB changed the requirements and now permits creditors to omit a fee from the LE if the fee is entirely paid by a seller credit (see 12 C.F.R. Pt. 1026, Supp. I, Paragraph 37[h][1][vi] – 2).