Published in BankingExchange.com, November 2021
It has been over 10 years since RESPA changed circumstance rules were passed, and over five years since the TILA-RESPA Integrated Disclosure (TRID) Rule created the Loan Estimate. Despite this aging, changed circumstance remain a substantial, inherent compliance risk for lenders. Because of the Rule’s complexity, lenders continue to find it a hotspot of operational costs and losses—and a potential source of liability.
The CFPB report on the TRID Rule released in late 2020 states that a year prior to the TRID rule, lenders’ examinations found occurrences of failing to provide the consumer a timely revised Good Faith Estimate (GFE) within three business days of receiving information to establish a changed circumstance, or redisclosed fees that exceeded tolerances at closing. The report states that after the TRID rule, there were still tolerance issues with redisclosure. The report further states that overall progress had been made, but also points out that some institutional programs remain weak.
With findings like those, a healthy mortgage origination disclosure process, including all the controls associated with it, requires continuous monitoring and retraining on this rule. Those controls include ongoing maintenance and continuous improvement efforts related to both automated technology and manual processes. While the hope of more automation is always a goal, the largest industrywide component of cost per loan is currently being invested in personnel expenses. This makes ongoing training a primary focus of any lender’s operation.
Under the TRID rule, lenders are held to a good faith standard in disclosing fees and charges on the loan estimate. This good faith standard is measured by comparing what is disclosed on the loan estimate with what the consumer actually pays at consummation. Absent some limited tolerance provisions, if the consumer pays more for a service at consummation than what was originally disclosed, the fee for that service would violate the good faith standard.
One way to limit tolerance violations is to consider whether the increased fee triggers a revised loan estimate. The TRID rule sets out six events that allow using a revised loan estimate for purposes of re-setting fees and performing the good-faith analysis. Those six events include:
- Changed circumstances that cause an increase to settlement charges
- Changed circumstances that affect the consumer’s eligibility for the loan or affect the value of the property securing the loan
- Consumer-requested changes
- Interest rate locks
- Expiration of the original loan estimate
- Construction loan settlement delays
Change in circumstance definition
The TRID rule contains a very specific definition of the phrase “changed circumstance” and it really comes down to one of three scenarios. First off, a changed circumstance may involve an extraordinary event beyond anyone’s control such as some type of natural disaster. A changed circumstance may also involve a situation where the lender relied on specific information to complete the loan estimate and that information later becomes inaccurate or changes. Finally, a changed circumstance may be the discovery of new information specific to the consumer or transaction that the lender did not rely on when providing the original disclosures.
Revised loan estimate triggering events
- Changed circumstances affecting settlement charges: If a changed circumstance causes an estimated settlement charge to increase beyond the regulatory tolerance limitations, the lender can issue a revised loan estimate as it relates to that charge.
Example: Assume a transaction includes a $200 estimated appraisal fee that will be paid to an affiliated appraiser. This fee is subject to zero tolerance. At the time of application, the information collected by the loan officer indicated that the subject property was a single-family dwelling. Upon arrival at the subject property, the appraiser discovers that the property is actually a single-family dwelling located on a farm. A different schedule of appraisal fees applies to residences located on farms. A changed circumstance has occurred (i.e., information provided by the consumer is found to be inaccurate after the Loan Estimate was provided) which caused an increase in the cost of the appraisal to $400. A revised Loan Estimate may be issued reflecting the increased appraisal fee of $400. By issuing a revised Loan Estimate, the $400 disclosed appraisal fee will now be compared to the $400 appraisal fee paid at consummation. For good-faith purposes, the appraisal fee has been re-set from $200 to $400 and there is no tolerance violation. Had a revised Loan Estimate not been issued, the $200 appraisal fee would have been compared to the $400 fee paid at consummation, a tolerance violation would have occurred, and a cure via a lender credit would be required. (See 12 CFR 1026.19(e)(3)(iv)(A) – Comment 1)
Note if issuing a revised loan estimate in response to increases in a 10 percent tolerance item, the item increased must be added to the other fees in the 10 percent category. A revised loan estimate, for good faith purposes, would only be allowed if the cumulative tolerance increased by more than 10 percent. Even though a fee increase may be due to a changed circumstance, a revised loan estimate can only be issued if the change also causes an increase beyond the permissible tolerance levels.
- Changed circumstances affecting eligibility or the value of loan security: A second event triggering for a revised loan estimate involves consumer eligibility for a product or program because a changed circumstance affected their creditworthiness or the value of the security for the loan.
Example: Assume that, prior to providing the Loan Estimate, the lender believed that the consumer was eligible for a loan program that did not require an appraisal and provide disclosures which do not include an estimated charge for an appraisal. During underwriting it is discovered that the consumer was delinquent on mortgage loan payments in the past, making the consumer ineligible for the loan program originally identified on the estimated disclosures. However, the consumer remains eligible for a different program that requires an appraisal. If the lender provides revised disclosures reflecting the new program and include the appraisal fee, then the actual appraisal fee paid at closing will be compared to the appraisal fee included in the revised disclosures for good faith purposes. (See 12 CFR 1026.19(e)(3)(iv)(B) – Comment 1)
- Consumer requested revisions: A third event that would justify a revised loan estimate involves consumer-requested changes. If the requested change impacts credit terms or settlement and causes an estimated charge to increase, a revised loan estimate may be issued to reset the charge.
Example: Assume that the consumer decides to grant a power of attorney authorizing a family member to consummate the transaction on the consumer's behalf after the Loan Estimate has been provided. Recording fees are now increased to record the power of attorney. If the lender provides a revised loan estimate reflecting the fee to record the power of attorney, then the charges at closing will be compared to the revised charges for good-faith purposes. (See 12 CFR 1026.19(e)(3)(iv)(C) – Comment 1)
- Interest rate locks: If the interest rate is not locked when the loan estimate is provided, the lender may issue a revised loan estimate once that rate is locked. The revised loan estimate should be updated to reflect the revised interest rate, as well as any changes to points disclosed under origination fees, lender credits, and any other interest rate dependent charges and terms.
- Loan estimate expiration: Another justification for issuing a revised loan estimate is when the intent to proceed is more than 10 business days after delivery of the loan estimate.
Example: Assume the lender includes a $500 underwriting fee on the Loan Estimate and delivers the Loan Estimate on a Monday. If the consumer indicates intent to proceed 11 business days later, the lender can issue a revised Loan Estimate that discloses any increases in fees from the time of the original Loan Estimate to the time of the revised Loan Estimate. (See 12 CFR 1026.19(e)(3)(iv)(E)-Comment 1)
- Construction loan settlement delay: In transactions involving new construction, where the lender reasonably expects that settlement will occur more than 60 days after the loan estimate was provided, the lender may provide revised disclosures to the consumer. A revised loan estimate may only be provided if the original disclosures stated clearly and conspicuously that at any time prior to 60 days before consummation, the lender may issue revised disclosures. If no such statement is provided, the lender may not issue revised disclosures.
Revised loan estimate timing
The TRID rule requires that the revised loan estimate be provided within three business days of receiving information supporting the need to revise. “Business day” is defined as any day the lender's offices are open for substantially all business functions. Therefore, lenders will need to determine whether Saturday is a business day for their institution. The window for issuing the revised loan estimate is short, so lenders must be on the alert for fee changes that trigger the ability to re-set tolerances.
Note that with a revised loan estimate, there is no requirement to provide the revised document seven business days before consummation—that timing rule only applies to the original loan estimate. However, the consumer must receive the revised loan estimate no later than four business days prior to consummation; and the revised loan estimate cannot be provided on or after the date the closing disclosure is issued.
The closing disclosure and resetting fees
The TRID rule was amended to address the “Black Hole” when using a closing disclosure to reset fees. The “black hole” is the gap between the end of the three-business-days period after learning of a change event, and the start of the four-business-days period prior to consummation. The TRID rule now eliminates the four-business-days timing element and makes clear that either an initial or a revised closing disclosure can be used to reset tolerances. Note that a revised closing disclosure must still be provided within three business days of receiving information sufficient to establish that a changed circumstance or other event triggering event has occurred.
Make every effort to collect all application information before issuing a loan estimate. Revised loan estimates are not permitted simply because the lender failed to collect all six pieces of information that trigger a loan estimate. For example, the failure to obtain the property address prior to issuing the Loan Estimate cannot be used as a reason to issue a revision if that address is later collected and impacts fees.
Ensure that staff is trained to obtain all application information before issuing a loan estimate. Also, collect complete and accurate application information. Lenders are generally required to provide the loan estimate to the consumer within three business days of receiving the loan application. An “application” is considered received upon the submission of the following six pieces of information:
- The consumer’s name
- The consumer’s income
- The consumer’s social security number to obtain a credit report
- The property address
- An estimate of the value of the property; and
- The mortgage loan amount sought
Lenders may want to consider sequencing application information requests to ensure an accurate loan estimate is issued the first time around. For example, a lender may want to collect the consumer’s mailing address or the product the consumer is interested in prior to collecting the sixth piece of regulatory application information. Collecting certain pieces of information first may allow more time to gather accurate fee information.
Lenders should also attempt to collect as much information as possible from the consumer during the application stage. While lenders can’t prevent the applicant from submitting the six pieces of application information, it is permissible to request additional information and make that request in any order on the application. Remember, lender errors and oversights in disclosing fees will not justify a revised loan. Put another way, a “bad” application is not a change in circumstances.
Only fees impacted by a triggering event can be re-set. For good-faith purposes, only those fees impacted by the triggering event can be re-set. The triggering events are not a license to issue a completely revised loan estimate and address other changes not affected by the event being relied upon.
Courtesy or informational revised loan estimates are allowed. Absent a change in circumstance or other triggering event, lenders may issue revised loan estimates for informational purposes. These revised loan estimates are done as a courtesy to keep the borrower abreast of new information, but they cannot be used to reset tolerances. Note that when issuing any revised loan estimate, all disclosed fees must be updated using the best information available.
Remember record retention. The TRID rule recordkeeping provisions require that documentation be maintained to support the reason for issuing a revised loan estimate to reset tolerances. Presumably, examiners will look for this supporting documentation when reviewing loan files that contain revised loan estimates. Lenders should keep records documenting the reason for revision, the original loan estimate and the revised loan estimate. This evidence of compliance should be retained for three years.
Manage multiple revised loan estimates. Lenders should implement systems to track and manage multiple revised loan estimates. This will be important for purposes of conducting the good-faith analysis and determining at what point fee increases exceed the 10 percent cumulative tolerance threshold.
Keep training the staff. As noted earlier, continuous training has been, and should continue to be, a focus of lenders and examiners alike. The CFPB continues to add resources to its TILA-RESPA integrated disclosures (TRID) page, including updated FAQ’s, executive summaries, transaction guides, interpretive rules, and industry material. Industry survey data shows one of the most effective training aids available is the CFPB’s Small Entity Compliance Guide.
Finally, monitoring and identifying triggering events and promptly redisclosing help prevent direct operational losses and reduce operational costs, resulting in a transaction that is able to close more quickly and avoid redisclosure via the Closing Disclosure.
In summary, using these tips, along with the abundance of resources provided for the Revised Loan Estimate process, will help manage operational costs, reduce compliance risk and demonstrate strong governance at your institution.