By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
“Knowledge is contextual . . . By ‘context’ we mean the
sum of cognitive elements conditioning the acquisition,
validity or application of any item of human knowledge.
Knowledge is an organization or integration of
interconnected elements, each relevant to the others . . .
Knowledge is not a mosaic of independent pieces each
of which stands apart from the rest. . . .
In regard to any concept, idea, proposal, theory, or item
of knowledge, never forget or ignore the context on
which it depends and which conditions its validity and use.”
(Leonard Peikoff, The Philosophy of Objectivism
lecture series, Lecture 5)
A seemingly anti-intuitive aspect of TRID is the use of the “(optional)” label for certain items (but not others) in Section H of the Loan Estimate (“LE”) and Closing Disclosure (“CD”). According to 12 C.F.R. § 1026.37(g)(4), “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” are to be disclosed in Section H of the LE. Similarly, “an itemization of each amount for charges in connection with the transaction that are in addition to the charges disclosed [in Sections A through G of the CD] for services that are required or obtained in the real estate closing by the consumer, the seller, or other party” are to be disclosed in Section H of the CD.
Taken together, a general basis of these requirements is that amounts disclosed in Section H are those which are not otherwise disclosed in Sections A through G. In summary, these are: amounts paid to the creditor (Section A); settlement services required by the creditor, the service providers for which the consumer is not permitted to shop for (Section B); settlement services required by the creditor, the providers for which the consumer is permitted to shop for (Section C); taxes (Section E); prepayments for recurring charges (Section F); and initial deposits into an escrow account (Section G).
These sections nearly cover every aspect of a typical mortgage transaction, including all services required by the creditor. This leaves to Section H those services which are not required by the creditor, which would be: (i) services which the required by some other party to the transaction; and (ii) services which the consumer freely adds for their own purpose. A summary of these services is best provided by the Consumer Financial Protection Bureau’s (“CFPB”) Official Staff Commentary, as follows:
“The costs disclosed [in Section H] include all real estate brokerage fees, homeowner’s or condominium association charges paid at consummation, home warranties, inspection fees, and other fees that are part of the real estate closing but not required by the creditor or not disclosed elsewhere [in the CD].” (12 C.F.R. Pt. 1026, Supp. I, Paragraph 38[g][4] – 1)
If all the fees in Section H are ones not required by the creditor, should the notation “(optional)” be added to all of them? Or, alternatively, should it only be added to those services which the consumer freely adds?
Administrative law requires the following:
“The parenthetical description ‘(optional)’ shall appear at the end of the label for items disclosing any premiums paid for separate insurance, warranty, guarantee, or event-coverage products.” (Supra § 1026.37[g][4][ii])
“The parenthetical description ‘(optional)’ shall appear at the end of the label for costs designated borrower-paid at or before closing for any premiums paid for separate insurance, warranty, guarantee, or event-coverage products.” (Supra § 1026.38[g][4][ii])
However, the Official Staff Commentary creates some ambiguity on this point as follows:
“3. Designation of optional items. Products disclosed [in Section H] for which the parenthetical ‘(optional)’ is included at the end of the label for the item include only items that are separate from any item disclosed on the Loan Estimate under [sections other than H]. For example, such items may include optional owner’s title insurance, credit life insurance, debt suspension coverage, debt cancellation coverage, warranties of home appliances and systems, and similar products, when coverage is written in connection with a credit transaction . . .
Examples. Examples of other items that are disclosed [in Section H] if the creditor is aware of those items when it issues the Loan Estimate include commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, and fees for inspections not required by the creditor but paid by the consumer pursuant to the property contract. Although the consumer is obligated for these costs, they are not imposed upon the consumer by the creditor or loan originator. Therefore, they are not disclosed with the parenthetical description ‘(optional)’ at the end of the label for the item, and they are disclosed [under “Other Costs”] rather than [“Loan Costs”]. Even if such items are not required to be disclosed on the Loan Estimate [in Section H], however, they may be required to be disclosed on the Closing Disclosure . . .” (Ibid. Paragraph 37[g][4]; emphasis added)
While the administrative law text of the TILA-RESPA Integrated Disclosure rule (“TRID”) clearly states that the label “(optional)” only applies to insurance-type coverages (and, based on the structure of TRID, only those coverages which are not required by the creditor), these Commentaries seemingly appear to expand this scope – and not in the most intuitive way.
The clause in paragraph 37(g)(4) – 3 “only items that are separate from any item disclosed on the Loan Estimate under [sections other than H]” appears to require that the notation “(optional)” be included on any fee disclosed in Section H (all fees disclosed in this section are not required by the creditor).
However, paragraph 37(g)(4) – 4 states that the notation “(optional)” should not be used in connection with certain fees disclosed in Section H which are not required by the creditor, without any further explanation as to how the notation should be used if it cannot be used for such fees.
The law, as in all fields which are heavily reliant upon language (which is a code of audio-visual symbols representing concepts), must be interpreted using the whole context of its provisions, rather than being solely dependent upon words and phrases. Part of the context of law is the rationale behind its formation and, in this instance, the CFPB’s analyses to the original TRID rule (“TRID 1.0”) are helpful.
In their analysis to the proposed TRID 1.0 rule, the CFPB stated the following:
“Proposed § 1026.37(g)(4) requires the disclosure of any other items that the consumer has become legally obligated to pay in connection with the transaction, to the extent that the existence of these items is known by the creditor at the time the Loan Estimate is issued. . . . The label for all items for which the amounts disclosed are premiums for separate optional insurance, warranty, guarantee, or event-coverage products must include the parenthetical ‘(optional)’ at the end. The items disclosed under proposed § 1026.37(g)(4) are not required by the creditor. These items are also not additional coverage or endorsements added to products required by the creditor. Accordingly, they are not disclosed under other paragraphs of proposed § 1026.37(f) or (g) [i.e., Sections A through G] and are disclosed under the subheading ‘Other.’ 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])
The CFPB’s analysis to the final TRID 1.0 rule reveals that many comments were submitted concerning the notation “(optional)” – all exclusively within the context of insurance-type coverage (especially title insurance; see 78 FR 79962 – 79963 [2013]). This, coupled with their analysis to the proposed rule, indicate that the notation “(optional)” was intended to be used only for insurance-type coverage which is not required by the creditor. This is emphasized in the analysis in the final rule: “The rule only requires the ‘(optional)’ designation for the purpose of informing the consumer that the creditor is not requiring that particular service, distinguishing such from the services required by the creditor under § 1026.37(f) and (g).” (Ibid. 79963 [2013])
Other resources which add context to the provisions of 12 C.F.R. §§ 1026.37(g)(4) & 1026.38(g)(4) are formal guides supplied either by the CFPB or by other entities which have a close connection to it (e.g., government-sponsored enterprises, like the Federal National Mortgage Association). In their TILA-RESPA Integrated Disclosure Guide to the Loan Estimate and Closing Disclosure forms (v. 2.1), the CFPB also only references “optional” within the context of insurance-type coverage (see p. 46). FNMA does as well in their UCD Implementation Guide (v. 1.4), stating that the notation “(optional)” should be used for “premiums for separate insurance, warranty, guaranteed, or event-coverage products” (see p. 139).
When these are taken together with the plain language of 12 C.F.R. §§ 1026.37(g)(4)(ii) & 1026.38(g)(4)(ii), they form a contextual framework for applying the provisions of the Official Staff Commentary. The context is that of the notation being used only for insurance-type coverages not required by the creditor. When so applied, the problematic clauses from the Commentary are into a new perspective which makes them logical fits within the context (albeit crude fits).
For example, the clause “only items that are separate from any item disclosed on the Loan Estimate under [sections other than H]” is not interpreted as meaning the notation should be added to all such items indiscriminately, but rather that this clause is meant to emphasis that insurance-type coverages disclosed in Section H are separate from those disclosed in Sections B and C, which are required by the lender (see 12 C.F.R. Pt. 1026, Supp. I, Paragraphs 37[f][2] – 3 & 4 and 37[f][3] – 3). This conclusion is supported by this other clause which appears later in Ibid. Paragraph 38(g)(4) – 3: “However, because the requirements in § 1026.37(g)(4)(ii) applies to separate products only, additional coverage and endorsements on insurance otherwise required by the lender are not disclosed under § 1026.37(g)(4).”s
The clauses in Ibid. Paragraph 37(g)(4) – 4 which prohibit the notation “(optional)” from being used in connection with fees not required by the creditor also supports this conclusion. Note that the fees listed prior to the prohibition are items which are not: (i) for insurance-type coverage; and (ii) required by the creditor, but they are required by another party. Using the caption “(optional)” for a service which is not optional (because the real estate broker or seller requires it) would be misleading. This is, essentially, what the problematic clauses were intending to convey (albeit clumsily); the notation “(optional)” is used for insurance-type coverage not required by the creditor, but it should not be used for any other type of service which is required by another party.
Thus, the answer to the two questions previously posited is: ““No, the notation ‘(optional)’ should only be added to insurance-type coverages disclosed in Section H – which, based within the context of the whole of TRID, would only be coverages not required by the creditor. The notation should not be used for other services, especially those which are required by another party.”
Both in philosophy and especially in English, context is everything. Dropping context can change a phrase (and a concept) from one thing to another. It is important when interpreting laws that the whole context of the law be considered, rather than treating clauses and sentences as their own island separated from the rest of the world.