How do the new tolerance rules work? What charges are subject to zero tolerance? How does a creditor know when a service provider is an affiliate of the broker?

A good way to think about this is these are now Regulation Z (Reg Z) rules. So for the affiliate question, a lot of people are used to thinking of affiliated business arrangements under RESPA. For Reg Z, this is going to be affiliates like you think about them for points and fees, for other purposes in Reg Z. It’s a Bank Holding Company Act definition, which is basically a control test—it’s set forth in the Bank Holding Company Act, but the same control test you would use for determining whether or not someone is an affiliate for points and fees purposes.

As for what tolerance buckets specific charges go into, a good way to think about this rule is that everything is zero tolerance unless excepted. So the baseline, and this is a change from RESPA, the baseline is now zero tolerance. The way this works in terms of rule architecture is you have a good-faith standard. If you charge more than the estimate then you violated good-faith unless there’s an exception. The good news is there are a lot of exceptions. There’s the 10% category of charges, which is any charge where you have allowed the consumer to shop (but the consumer doesn’t shop) and the charges are not being paid through an affiliate of the broker or the creditor. And recording fees—those are in the 10% category. There’s also a whole slew of charges that are included in the unlimited tolerance category, meaning these charges can vary as long as the estimates were made on the best information reasonably available (you always have that minimal standard). For these charges, what is actually paid at consummation can be higher than what’s estimated. These charges are things like prepaid interest, property insurance premiums, escrowed amounts, charges for non-required services, such as owner’s title not required by the creditor (the Bureau clarified this), or charges where the consumer actually did shop. Under the rules shopping means you gave the consumer a list of service providers, and the consumer said, you know, I think for my title insurance I’m not going to go with your recommended provider, I’m going to go with my uncle, who’s in the title insurance business, and does that. That charge will not be subject to any tolerance at all. So there is a slew of exceptions. What’s left is basically the origination charges, charges paid to the creditor, charges paid to the broker, charges paid to affiliates of the creditor and the broker, and transfer taxes. So basically you have a set list of types of charges that are in the commentary to 19(e)(3), which tells you fees paid to the creditor, the broker, or affiliates of either. Required services where shopping is not permitted is one that I left out. So if the creditor is requiring you to pay for a service and also picking your service provider and not allowing you to shop, that’s subject to zero tolerance. And then transfer taxes as well.

Answered By: Andy Arculin