|
TRID: Give Credit Where Credit Is Due
|
|
The disclosure and final accounting of lender credits under the new TRID rules seem to be creating some problems for lenders, closing agents and consumers. What is the best way for lenders to disclose and account for any credits offered to a borrower to reduce their closing costs?
|
|
In one regard, the TRID rules are clear on the disclosure and handling of lender credits. Once a lender discloses a credit to a consumer, that credit may not be reduced unless by a bona fide changed circumstance. The change in circumstances which may result in a reduction in the lender credit are limited:
|
|
1.
|
Interest rate related charges in connection with a rate lock; or
|
|
|
2.
|
An expiration of an initial Loan Estimate due a consumer's failure to indicate their intent to proceed within the time allotted to do so.
|
|
|
|
That's it. No other reasons. Number 2 is pretty simple. If you provide a Loan Estimate and the consumer does not act quick enough to accept the terms, you can cancel that estimate and start over. Number one presents a few challenges.
|
|
It is very important that a lender be careful in how and when any credits are disclosed to an applicant. For the most part, once disclosed, the credit cannot be reduced. As an example, if a lender discloses a $450 credit toward the applicant's appraisal, but the appraisal comes in for less, the lender may not reduce the credit accordingly. The full credit as initially disclosed must still be provided to the consumer at closing. Good reason to be sure that any lender credits disclosed will not exceed the total amount of the borrower's closing costs.
|
|
Let's take a look at some options for disclosing and accounting for lender credits on the Loan Estimate and the Closing Disclosure. As you know, the Loan Estimate does not allow for any specific breakdown of a lender credit. The full intended amount must be disclosed in Section J. In most cases this amount is estimated initially based on premium pricing of a loan, which is the pricing of the loan to return a certain premium back to the lender above their standard anticipated profit margin. This premium is returned to the borrower in the form of a lender credit.
|
|
This lender credit is estimated at application before the loan is locked by increasing the then current street price to realize the desired credit to be provided to the borrower. In such cases this amount may decrease when the loan is locked depending on the borrower's rate decision. The borrower may choose to take a lower rate and forego the credit, a higher rate to increase the credit, or something in between. Regardless, the lender has 3 business days from locking the rate to make any adjustment to the lender credit. Once those 3 days are gone, the lender may no longer reduce the credit. Accordingly, it is extremely important to have a system to ensure a revised Loan Estimate is issued within 3 business days of locking a loan. By the way, it's the law, regardless of any change in fees or lender credits.
|
|
Once disclosed in Section J of the Loan Estimate the final lender credits may be reflected on the Closing Disclosure in 3 different ways. How you ask?
|
|
1.
|
As a flat total credit, again listed in Section J of the Closing Disclosure equal to, or greater than, that disclosed in the Loan Estimate'
|
|
|
2.
|
As amounts paid by the lender toward specific borrower closing costs that aggregate at least the initial disclosed lender credit; or
|
|
|
3.
|
A combination of specific amounts paid for borrower closing costs and an amount reflected in Section J of the Closing Disclosure that totals at least the amount of the final disclosed lender credit.
|
|
|
|
Any of these ways are acceptable as long as the total of all lender credits reported on the final Closing Disclosure is equal to, or greater than, the amount disclosed on the final Loan Estimate.
|
|
A lender can decide how best to have their credits reflected on the final Closing Disclosure. The simplest way is to have them show as a total in Section J. This allows a quick and easy comparison for the consumer and the closing agent. Some lenders may choose to pay some of the borrowers pre-paid finance charges to reduce the APR. The benefits of doing so are somewhat questionable since most consumers don't understand the APR and it is no longer prominently displayed on either of the new disclosures. In most cases, the borrower wants to be sure they received what they were promised when they applied for the loan. This can be accomplished by having them compare the amount disclosed in Section J of their final Loan Estimate to that appearing in Section J of the final Closing Disclosure.
|
|
One more thing, the lender credits disclosed upfront may not be used to offset any fee tolerance cures required at the closing. A lender must reimburse the borrower for these fee overages at amounts above what they had disclosed as the lender credits. When this becomes necessary the fee cures must also be listed in Section J of the Closing Disclosure, with a separate entry made to indicate the amount of the fee that is attributable to these fee cures. The amount of the lender credit less any fee tolerance cures must be equal to, or greater than, that disclosed to the consumer on the final Loan Estimate, assuming that amount was determined and disclosed correctly.
|
|
At the end of the day it's quite simple. CFPB expects that a consumer will receive what they are promised. No bait and switch; no double talk. You tell a consumer they'll get a lender credit of $2000 at closing; it's up to you to price the loan fairly, depending on market conditions, to provide them that amount when they close, nothing less. It's only fair.
|
|
|
— Mike Vitali - SVP/Chief Compliance Officer
|
|
|
Mike Vitali is SVP/Chief Compliance Officer for
LoanLogics. He has over 40 years of experience in all
facets of mortgage lending. Just prior to coming to
LoanLogics, he served for more than 12 years as an EVP
and Chief Risk Officer for a major national lender. He
also served as legislative chair for both the MBA of
Greater Philadelphia and MBA of Pennsylvania, and is a
member of several task forces dealing with compliance
issues for the National MBA.
|
