January 2017, Issue 01 When Can a Lender Credit Be Reduced? The handling of lender credits under the new TRID rules still seems to create problems for lenders, closing agents and consumers. When can a lender credit be reduced and how should these be reflected on the final Closing Disclosure? According to the CFPB, the TRID rules are clear on the disclosure of, any allowable reduction in and handling of lender credits. Once a lender discloses a credit to a consumer, that credit may not be reduced unless by an acceptable bona fide changed circumstance. Under the rules the only changes in circumstance that can acceptably result in a reduction in the lender credit are: 1. Interest rate related charges in connection with an initial rate lock, when not locked at application 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 These are outlined in the Truth in Lending Act (TILA) Section 1026.19(e) (iv) (D) and (E). Further clarification can be found in the TILA Commentary 19(e) (3) (i) 5 and 19(e) (3) (iv) (D). 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 1 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. The law views any reduction in a lender credit as an increase in the loan charges to the consumer. As you know, charges may only increase under certain allowable, justifiable change of circumstance. 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. The Loan Estimate doesn't allow for any breakdown of a lender credit. The full intended amount must be disclosed in Section J. In most cases this amount is estimated based on premium pricing of *a loan. Premium pricing of a loan creates a return back to the lender above their standard anticipated profit margin. This premium is then given back to the borrower in the form of a lender credit. This is estimated at application when a loan is not 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, as long as it was initially disclosed in good faith based on then current market conditions and loan pricing. When locking the borrower may subsequently choose to take a lower rate and forego the credit, a higher rate to increase the credit, or something in between. The lender then has 3 business days from locking the rate to make any applicable adjustment to the lender credit and issue a revised Loan Estimate. Once the 3 days are passed, the lender may no longer reduce the credit. Accordingly, it is extremely important to have some 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 the loan is locked and the credit established, the credit disclosed may not be decreased. If a rate expires the lender may extend the rate, providing the same credit, eating the cost of the extension. There is no provision presently in the law allowing for a lender to charge a consumer for a rate extension. If the loan must be restructured to allow for qualification it's best to cancel the original loan and start over with a new application and new disclosures. In such cases the lender may adjust any credit connected to the new loan. 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 and the amount on the final Loan Estimate is not reduced except as the result of the initial rate lock. 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 credit attributable to these fee cures. The amount of the total 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 relative to market conditions and provide them that amount when they close, nothing less. It's only fair. The game has changed. Play fair my friends. — 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.     This material is provided as a general information service by LoanLogics, Inc. and its applicable subsidiaries and affiliates ("LoanLogics"), and is not intended to provide financial, regulatory or legal advice on any specific matter. The information contained herein reflects the views of LoanLogics and sources reasonably believed by LoanLogics to be reliable as of the date of this publication. LoanLogics does not make any representation or warranty regarding the accuracy of the information contained in this material, and there is no guarantee that any projection, forecast or opinion in this material will be realized. Any links provided from outside sources are subject to expiration or change. © 2017 LoanLogics, Inc. 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