If the LE must be provided based on incomplete information, what should I do when a change increases an estimated cost?

Similar to the current GFE and TIL requirements, the LE must provide a “good faith estimate” of the terms and charges associated with the transaction.[1] The core requirement here is that you must “exercise due diligence” to obtain “the best information reasonably available . . . at the time the estimate is provided.”[2] Fortunately, you generally may rely on the representations of the parties and service providers.[3] However, your systems must be able to track these representations and tie them to the estimates provided on the LE because the TRID rule requires you to maintain records demonstrating compliance with these requirements.[4]

Even if an estimate was based on the best information reasonably available, additional restrictions on increasing the estimated charges apply. Specifically, unless an exception applies:

  • You cannot charge more than the amount on the LE for lender fees, broker fees, transfer taxes, affiliate fees, and third-party fees if the consumer could not shop for the service (“zero tolerance” category);[5] and
  • You are limited to an aggregate increase of 10% for the total amount of recording fees and third-party fees for the services for which the consumer is permitted to shop (“10% tolerance” category).[6]

While at first blush these may seem like the familiar “tolerances” adopted by HUD under RESPA in 2010, they differ in several important respects. Most notably, affiliate fees have been moved to the zero tolerance category, so you must disclose the exact cost ultimately charged to the consumer for all fees paid to an affiliate, unless a permitted exception applies. Furthermore, the rule expands liability to include a private right of action for violations of the tolerance requirements because the Bureau’s “good faith” requirement relies on TILA as well as RESPA.[7]

When the limitations or tolerances apply, the amount actually paid by the consumer at closing can only exceed the amount on the LE if a “changed circumstance” or other exception applies (a “permitted exception”), and a revised LE is issued within three business days of “receiving information sufficient to establish that” the exception applies.[8]

The TRID rule specifically requires you to maintain proof of the reasons justifying each cost increase.[9] This means that, for each increase, you must document:

  • The information demonstrating that the increase falls within one of the permitted exceptions;
  • When you learned of that information;
  • That the increase is solely attributable to the exception; and
  • That a revised disclosure was provided within the applicable time period.[10]

As with tracking the application information, your systems must also be able to track and store the cost information coming from various sources (the borrower, the settlement agent, appraisers, and other service providers), determine when a permitted cost increase has occurred, and issue a revised disclosure by the applicable deadline.

This can be especially complicated when, for example, multiple changed circumstances cause multiple increases of less than 10% in charges that fall within the 10% tolerance category. The TRID rule provides that the 10% tolerance does not reset until there has been an aggregate increase of 10% or more and a revised LE has been provided within three business days of receiving information establishing that increase.[11] However, the CFPB’s forms do not include a total for the charges in the 10% tolerance category, so you must track this separately.

Consider the following scenario, which is adapted from an example provided by the CFPB in the TRID rule:[12]

  • The estimated fees for the pest inspection and title services on your initial LE are subject to the 10% tolerance category.
  • After the initial LE is provided, you receive information that a permitted exception caused the pest inspection fee to increase by 5% of the total amount of charges in the 10% tolerance category. Because the increase is less than 10%, you are permitted – but not required – to provide a revised LE informing the consumer of the increase. Regardless, this increase does not reset the 10% tolerance category and this LE will be disregarded when determining compliance.
  • Three weeks later, on a Monday, you receive information that another permitted exception has caused the title fees to increase by 6% of the total amount of charges in the 10% tolerance category. Because there has now been an aggregate increase of more than 10%, you must provide a revised LE within three business days (i.e., by Thursday) if you want to pass the 11% increase on to the consumer. If you do so, this revised LE will be used to assess compliance.

This example shows that determining compliance goes beyond tracking each individual cost increase. To accurately determine whether you have complied with the TRID rule, you must be able to maintain a running tally of cost increases with documentation of the permissible exception justifying each increase so that you know when a revised LE must be provided.

[1] 12 C.F.R. § 1026.19(e)(1)(i).

[2] 12 C.F.R. § 1026.17(c)(2)(i); cmt. 17(c)(2)(i)-1.

[3] Cmt. 17(c)(2)(i)-1 (stating that lenders “might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, or to realtors for taxes and escrow fees”).

[4] Cmt. 19(e)(3)(iv)-3 (stating that lenders “must retain records demonstrating compliance with the requirements” to provide the LE).

[5] 12 C.F.R. § 1026.19(e)(3)(i); Cmt. 19(e)(3)(i)-1.

[6] 12 C.F.R. § 1026.19(e)(3)(ii).

[7] See 78 Fed. Reg. 79730, 79799 (Dec. 31, 2013).

[8] 12 C.F.R. § 1026.19(e)(4)(i). If charges increase because the interest rate was not locked when the LE was provided, and you enter into a rate lock agreement with the borrower, the revised LE must be provided on the date the interest rate was locked. 12 C.F.R. § 1026.19(e)(3)(iv)(D). The Bureau has proposed to relax this requirement so that the revised LE need not be provided until the next business day after the rate is locked. See, e.g., 79 Fed. Reg. 64336, 64344 (Oct. 29, 2014) (hereinafter “Proposed Amendment”).

[9] Cmt. 19(e)(3)(iv)-3.

[10] Cmt. 19(e)(3)(iv)-3.

[11] 12 C.F.R. § 1026.19(e)(3)(iv)(A); cmts. 19(e)(3)(iv)(A)-1.ii and 19(e)(4)(1)-1.ii.

[12] Cmt. 19(e)(4)(i)-1.ii.

Answered By: Ben Olson

In conducting due diligence on a supplier/vendor, at what point is the line drawn between accepting the way the supplier/vendor conducts themselves to prescribing how they should do it? By prescribing, are you accepting risk and liability unnecessarily?

As far as the regulator is concerned, the supervised entity has the liability and responsibility. Indemnification provisions within a contract – if you specifically direct your vendor to do something a certain way because you believe that is in compliance with an applicable law and it just turns out the regulator has a different view – at some point down the line it may be more difficult to invoke that indemnification provision if you’re the source of the [legal] interpretation. That’s certainly a risk and something you should take into account. But of all the risks at play here, I think that, if you see something in the way your vendor is handling whatever the task might be that you’re concerned creates a compliance issue, the obligation on you is to make sure it’s being done correctly. If that means you’re directing your vendor and taking on yourself the risk that you’re wrong, I think that’s what’s expected of you under all the guidance.

Note: This transcript has been edited from the January 2015 vendor management webinar for clarity and completeness.

Answered By: Ben Olson

Is there any chance the CFPB will delay the August 1 implementation date?

I think this question came up every time I did a panel on behalf of the CFPB. The answer I always gave was a firm “no,” and that directive came from up high. I think Rich Cordray has said the same thing several times when he’s been out speaking as well. And, to give a little flavor to this, the thinking at the CFPB has always been that yes, they do appreciate TILA-RESPA is a massive implementation effort. I’ve heard it described as five times of all of Title 14 and I don’t think that’s wrong. The CFPB gets that. But the prevailing viewpoint has always been that normally a year is enough time to implement a new rule, even a big one. The CFPB gave 18 months for TRID and even started the 18 month clock after Title 14 had taken effect. So basically, they gave the industry time to finish up all of the last round of rules and then gave an additional six months to do TILA-RESPA. The Bureau has always viewed that as more than enough time, and I would not expect that they will delay the effective date, no matter how many times they’re asked.

There have been discussions of some alternatives. One idea that’s been kicked around is delayed enforcement of the final rule, or basically, a good-faith compliance standard for examinations and enforcement where the CFPB will say they’re not going to come after everyone for technical violations of the rule. That may well be where they ultimately land, but the caution that I always give is the concept of private liability. If the Bureau were to do that, if the Bureau were to say, we’re not going to start examining you for X number of months, and when we do, we’re only looking for good-faith compliance. In the meantime, our enforcement people aren’t going to come after you unless you’re doing something willful or knowledgeable. That’s all well and good from the CFPB. But there’s still the possibility that someone files a civil lawsuit and you just go before a court and you’re litigating in court over a TILA violation. I think the Bureau would have to do something formal – something through an amendment of the rule – or there would have to be some kind of legislative act in order to stop that from happening. I don’t mean to say that I think people are going to start filing lawsuits on day one, but it’s possible, there’s exposure there, there’s risk. And if anyone is banking on the Bureau not coming after them as a green light for non-compliance, they would still be at risk of someone filing a civil lawsuit. And I think that would be the worst-case scenario: someone files a TILA lawsuit and you’re not complying with TILA and then you lose a case in court. I think that’s probably worse than getting dinged by an examiner. So I always caution people that that question is still going to be out there regardless of what the Bureau does, unless the Bureau does what I think they’ve been very clear that they won’t, and that’s delay the effective date. So, moral of the story is that there’s no choice but to be ready by August 1.

This transcript has been edited from the May 2015 round table discussion for clarity and completeness.

Answered By: Andy Arculin

The way I look at it, we (the lender) already are responsible for everything. How does TRID increase our liability with both regulators and investors in addition to what we have today?

Right, the lender is technically responsible for everything today. There are a couple of ways this complicates things. One, the liability risk is a lot more substantial. There are a lot of confusing aspects to the RESPA GFE rules that I think everyone got comfortable enough with, but the threat of a private lawsuit really just wasn’t there. An example is the 10% tolerance in Reg X—I don’t know if anyone ever really fully understood how it’s supposed to work, and HUD never explained it. But everyone started doing it a certain way and it wasn’t something that was subject to private liability where a court could really come in and undermine what they’d done. Now everything’s under Regulation Z and potentially carries with it TILA liability. That is a pretty big change. The TILA disclosures have always had liability, but today’s TILA disclosures really aren’t that complicated. These are a lot more complicated. The lender also is legally considered the party doing the disclosures, even in a broker transaction. The lender can’t take a package from a broker and consider that receipt of the application. If a lender is doing work with a broker, the broker is presumed to be acting on behalf of the lender, making a disclosure in the lender’s shoes. These changes haven’t necessarily increased responsibility that much, but they’ve increased exposure. In general, these are just harder forms. They’re a lot more detailed, a lot more technical. And now everything is potentially subject to scrutiny, whereas before RESPA and the GFE rules weren’t tightly enforced and there was no private right.

Answered By: Andy Arculin

Can a secondary market purchaser be sued for anything I as a lender—or one of my vendors—get wrong?

I think this is really something that has to be explored by courts. The easy answer is no. The violation has to be apparent on the face of the disclosure, which I tried to talk about earlier. What does that mean for the TILA disclosures? It typically means you can look at the documents that were received with the assignment and the disclosure and discover that there’s a violation. The finance charge was done wrong, it was understated, and therefore you’re liable as the assignee, because you should have caught it in your QC. That’s fairly straightforward. But with RESPA there was no liability, either for lenders or for assignees, other than just enforcement against lenders. So what happens now? These new disclosures all have a private right of action, or presumably do. There are some questions that will need to be litigated about where private rights exist and where they don’t, but I think you can probably assume for now that a violation of basically anything on the disclosure form will at least give someone an opportunity to file a lawsuit that could potentially carry liability. The question is really what violations will become apparent on the face of the disclosure? In the past, if you look at case law about TILA assignee liability, issues like timing have been dismissed. Courts have said you can’t determine whether or not the disclosure was given within the timing requirement based on the face of the disclosure; therefore, there won’t be any assignee liability for timing violation. But I think it’s less clear here, not because assignees are supposed to have a crystal ball, but there are disclosures that say the date issued is X, and it’s supposed to be the date the disclosure was delivered or placed in the mail. For the closing disclosure, it’s supposed to be when it was provided to the consumer. It’s questionable whether the court may change its tune on issues like that. Other things like the RESPA tolerances have never really fully been explored by courts because the issues never come up. There’s been TILA disclosure and TILA tolerances but not RESPA tolerances, meaning you’ve made a disclosure of an estimated settlement service and violated the good faith standard because you charged the consumer more than the estimate and you didn’t refund the money back. With those types of issues, it’s really unclear what courts are going to do. The CFPB didn’t even tell us whether there were prior rights of action within the rule, let alone address those types of questions. To be fair, I don’t think they really could have. Those are statutory questions courts will have to hash out. It will probably be years before courts of appeals have gotten those types of issues and decided them. Even then, they may not agree.

Answered By: Andy Arculin

Do you believe that there will be a flood of lawsuits after October 3rd? Assuming not, why do you think secondary market purchasers are going to be so risk averse?

I don’t think there’s going to be a flood of lawsuits right after October 3rd. I think the market will probably look a lot like it does today, which is generally a performing market. People don’t tend to file lawsuits for TILA disclosure violations when they’re happy with their loan. That’s a given. There haven’t been a whole lot of them recently. But if there’s a point in time where loans are not performing as well, I think you would see more. Before I went to the CFPB, I worked with another firm in Washington D.C. and I did a lot of litigation in this space, most of it class-action litigation on issues like TILA and RESPA. Class-action lawyers are not necessarily out there defending someone who is going through a foreclosure. In a lot of cases—and this may just be my jaded viewpoint shining through—they are looking for a payday and looking to basically file a lawsuit, find a class rep, find a violation that can be tried on a class-wide basis and file a lawsuit. There are limitations on TILA that make TILA less common than something like RESPA Section 8, where you get three times the amount of the settlement service for each kickback. Here you have a million dollar cap plus fees and costs. But in my opinion, something like the co-op issue is a good example, where you have an entire class of transactions that is either covered or it’s not, and the market has gone in a certain direction because they think that’s what the bureau wants them to do, even though if you really looked at state law, it may say a cooperative share is personal property, not real property; therefore, it’s not covered. I could see someone filing a class-action on that theory, saying that there’s a violation of the TILA disclosure rules because they used the wrong form and trying it on a class-wide basis, and maybe even winning. I think there’s a risk of lawsuits like that. There’s also just the general risk of liability. In other context, if there’s a market downturn, lawsuits like that may gain traction. I think we all hope the market doesn’t take a turn for the worse, but it could. If you’re an investor who’s planning on holding this loan for X number of years, you don’t have a crystal ball and you’re not willing to take on the risk. You simply don’t want someone else’s problem to become yours.

Answered By: Andy Arculin

If Title Companies aren’t motivated to reduce the risk they bring to the transaction, what can we as lenders do, other than ask for assurances in writing, that they assume liability for their own actions?

Well, I would hope that those title agents that don’t realize the seriousness of this are looking for alternate work, because obviously the lenders need to find people that understand the value in this.

I could tell you that all the good title companies that we run across have taken this serious for quite a number of years, and I think the lenders are going to search and seek those out and make sure that all the good ones are properly trained, have all the best practices, have the SOC 1 certifications, SOC 2, whatever it may be, vendor management to make sure that they’re identifying who they’re doing business with and what they’re doing to protect all the data and information that we have.

I think that’s something that’s going to weed itself out. If a title company doesn’t realize by now, and really if they haven’t started by now to realize how important all this is, I don’t that know the lenders can afford to do business with them, so that’s when the title companies got to step it up and make sure that they are being compliant.

Answered By: Brent Laliberte

Can you please reiterate that it is the settlement agent’s responsibility under TRID to provide the seller’s CD? As a lender this is so problematic that title companies and such do not, under their obligation under the rule.

Richard Horn: I was going to reiterate that, it is a requirement under the rule under 19(f)(4), for the settlement agent to provide the seller’s CD.

Brent Laliberte: I can tell you, we haven’t had any issues with that, that’s been going pretty smoothly, the bigger issue that we’ve had is, the Realtors are trying to get us to release that seller’s CD or that buyer’s CD to them, and that’s when we just tell them that’s obviously that’s a lender form, that we have no authority to release.

What we’ve been seeing lately is some kind of homebrewed authorizations, ‘Hey look, my client said it’s okay to give me this,’ look, that’s not good enough for me, I need to comply with the rule, I need to give it to the consumer, and if you want to get it from the consumer, you need to get it from the consumer, but absent written authorization from the lender allowing us to release the CD to the Realtor, we’re not even touching that, but getting it to the seller is not a problem for us.

Richard Horn: I’ll reiterate that this is why it’s so important for lenders, where they have the ability to do so, to really pay attention to the settlement agents that they are doing business with. Imposing some type of reasonable requirement, like, third party certification of compliance with ALTA’s best practices or other even more advanced certifications.

Because there is a great deal of potential liability with these TRID disclosures that actually could be caused by a settlement agent not complying with TRID, providing inaccurate information, or not following the closing instructions. Making sure that you are dealing with settlement agents that actually have the proper compliance management systems, and proper certifications, could be helpful in reducing the risk of that liability.

Can a numerical value on a CD (Fee value omission) be deemed to be a non-numerical clerical error if the LE reflects the accurate value and the omission on the value on the CD is a result of a bona-fide technical error (data mapping)? See section-by-section analysis stating “The Bureau does not believe the fact that a charge was disclosed in a different manner to a consumer before an incorrect disclosure was provided is material for purposes of classifying a clerical error.”

So, the way that I usually read the preamble is if there’s a sentence in the preamble, I check whether it’s responding to a public comment that was received. For many of the sections in the preamble, there’s a long list of each comment that was received, or a long description of each comment that was received to that particular revision.

When I led the rule the reason why that was important to me to include was because I wanted the responses, and the description of the reasons why the CFPB did what it did, to be responsive to the public comments that were received. I wanted that all to be in one document. And so sometimes, it’s important not to just read a sentence in isolation in the preamble, especially a sentence like that and to go see what type of comment it was responding to, and so I would want to look at that first before providing an official answer.

But I would think that, considering that what we are talking about a numerical disclosure, that that would not qualify as a violation that’s curable under that section, although it could be curable under TILA section 130(c) as I mentioned, which is a defense to liability, a defense to civil liability, for violations that were really unintentional bona fide clerical errors.

Answered By: Richard Horn

Are there any protections against civil liability for lenders who are making a good faith effort to comply with TRID regulations?

The good faith period that the CFPB and other regulatory agencies have provided does not affect whether lenders or investors have civil or assignee liability. It only affects administrative liability, so potential for violations that are cited by the regulatory agency. Civil liability is completely unaffected by these administrative good faith periods because civil liability basically accrues from the statute and regulation themselves, and those are in effect in the CFR, and so regardless of what the CFPB says about taking into account good faith, a borrower can still sue under the statute or regulations that’s on the books.

Actually, I think I should add, that’s why it would be helpful, and why there was a push in Congress to have a hold harmless period added to TILA for the implementation of TRID. It didn’t get anywhere in Congress, but perhaps, you know, there could be some movement on that later on, or perhaps there could be some limit to the rule to provide such a period in the regulation itself.

These are all things that I think a lot of folks in the industry are thinking about. But for now, there is no protection from civil liability for good faith efforts.

Answered By: Richard Horn

Has there been any success in negotiating a materiality standard with regard to breaches of reps and warrants, especially as to TRID matters?

There have been some successes in negotiating a materiality standard. Typically, where I’ve seen it most successfully done is by including the materiality standard in the repurchase demand section, or the remedy section. It’s always helpful to have materiality in the actual rep and warrant also, but it helps and it’s important to have materiality language in the remedy section. I don’t have any specific examples of this being done in connection with TRID issues or liability, other than what we discussed earlier in the presentation which is the “substantial compliance with law” language being a concern of the rating agencies. So “material compliance with law” would be similarly concerning to the rating agencies. I would suggest trying to limit the liability in the remedy section, as opposed to in the rep and warrant section.

Answered By: Amanda Raines Lawrence

Settlement agents are using the new ALTA settlement statement with the final CD. It would seem that this disclosure would fall under TILA (any other disclosure). Should investors be checking settlement (disbursement of funds) with the final CD?

Section 131(e) of the Truth in Lending Act (TILA) states that an assignee (purchaser) of a consumer credit transaction secured by real property is liable if a violation that carries a private right of action is “apparent on the face of the disclosure statement,” which can be determined by comparing the disclosure statement to a “disclosure of disbursement,” among other documents.  Therefore, if the ALTA settlement statement is used to disclose the disbursement of funds, an investor may wish to compare that statement to the items on the Closing Disclosure that carry a private right of action, such as the aggregate settlement charges disclosed under section 128(a)(17) of TILA.

Answered By: Amanda Raines Lawrence

Regarding the HUD OIG audit of HUD’s indemnification recovery process, what were HUD OIG’s conclusions?

The HUD OIG concluded that HUD had not been doing an adequate job of recovering for losses when indemnification agreements were in place. Specifically, it found that there had been recoverable losses on hundreds of loans included in the review, and although enforceable indemnification agreements were in place, HUD had not taken action to collect the losses pursuant to those agreements. Ultimately, HUD OIG recommended that HUD improve its processes around this, and HUD agreed with the OIG’s recommendations and indicated that it would be initiating billing processes where appropriate, and changing its processes to prevent recurrence of this issue.

Answered By: Melissa Klimkiewicz

Does an indemnification agreement remove a loan’s QM status?

That’s a question that HUD has specifically addressed. The existence of an indemnification agreement doesn’t per se remove QM status. But indemnification demands or resolution of a demand that relates to the underlying eligibility of the loan and satisfaction of underwriting requirements could indicate that the loan didn’t have qualified mortgage status in the first place.

Answered By: Melissa Klimkiewicz

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