TILA-RESPA Integrated Mortgage Disclosure Rule: The Loan Estimate Disclosure – Good Faith Requirement and Tolerance Limitations

Written by JiJi Bahhur, Director of Regulatory Compliance

In the last TILA-RESPA blog posting, we covered the timing and delivery requirements for the Loan Estimate.  Today’s discussion topic is the good faith requirement and its applicability to the tolerance limitations set forth in the TILA-RESPA final rule.

Good Faith Requirement:

When completing the Loan Estimate, the creditor is required to act in good faith and exercise due diligence to obtain information necessary to complete the disclosure.  The TILA-RESPA final rule allows creditors to rely on the representations of other parties in obtaining the needed information. However, if the information is not reasonably available at the time the Loan Estimate is made, the creditor may use estimates and, where required (§ 1026.17(c) or § 1026.19), provide new disclosures at a later time. It should be noted that when estimates are used, it must be designated as such on the Loan Estimate.

Good faith, for purposes of the Loan Estimate, is determined by calculating the difference between the estimated charges in the original Loan Estimate and the actual charges paid by or imposed on the consumer in the Closing Disclosure.  Generally, the following is true regarding good faith determination:

• Regardless of whether the creditor later discovers a technical error, miscalculation or underestimation of a charge, the Loan Estimate is considered to be made not in good faith if the charge paid by or imposed on the consumer exceeds the amount originally disclosed on the Loan Estimate.
• Without regard to any tolerance limitations, a Loan Estimate is considered to be made in good faith if the creditor charges the consumer less than the amount disclosed on the Loan Estimate.

There are circumstances where a creditor is allowed to charge the consumer more than the amount disclosed on the Loan Estimate.  We will highlight two of those situations below since they relate to the tolerance limitations and save “changed circumstances” for a future post.

Tolerance Limitations:

In keeping with the good faith requirement, creditors must ensure they stay within the new tolerance levels prescribed by the TILA-RESPA final rule. The tolerance levels are broken into three categories (no tolerance limitation/variations permitted, 10 percent cumulative tolerance, and zero tolerance) and can be complex.

 No Tolerance Limitation (Variations Permitted)

Where the original estimate, or lack of an estimate for a particular service, was based on the best information reasonably available at the time the disclosure was provided, the creditor is permitted to charge consumers more than the amount disclosed on the Loan Estimate without any tolerance limitation for the following charges:

• Prepaid interest;
• Property insurance premiums;
• Amounts placed into an escrow, impound, reserve or similar account;
• If chosen by the member, fees paid to third-party service providers that are not included in the creditor’s written list of service providers; and
• If chosen by the member, fees paid to third-party service providers for services that were not required by the creditor.

10 Percent Cumulative Tolerance

For certain charges and fees, the amounts paid by or imposed on the consumer are grouped together and subject to a 10 percent cumulative tolerance. This means the creditor may charge the consumer more than the amount disclosed on the Loan Estimate for particular charges as long as the total sum of the charges does not exceed the sum of those same charges disclosed on the Loan Estimate by more than 10 percent. The charges subject to the 10 percent cumulative tolerance are:

• Recording fees; and
• If the creditor permitted the consumer to shop, fees paid to an unaffiliated third-party service provider on the creditor’s written list.

If a consumer chooses a provider that is not on the creditor’s written list for a service that would otherwise be included in the 10 percent cumulative tolerance category, the creditor will no longer be limited in the amount that may be charged for the service. Rather, the charge is removed from consideration under the 10 percent tolerance level and instead would fall under the no tolerance limitation. See, § 1026.19(e)(3)(ii).

For charges subject to the 10 percent cumulative tolerance threshold, to the extent the total sum of the charges added together exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10 percent, any difference must be refunded to the consumer.

Zero Tolerance

For all other charges, the TILA-RESPA rule provides that creditors are not permitted to charge consumers more than the amount disclosed on the Loan Estimate under any circumstances other than changed circumstances. The zero tolerance charges include:

• Fees paid to the creditor;
• Fees paid to a mortgage broker;
• Fees paid to an affiliate of the creditor or mortgage broker;
• Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider for a settlement service;
• Transfer taxes; and
• Lender credits.

For charges subject to the zero tolerance threshold, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer. See, § 1026.19(e)(3) and Comment 1026.19(e)(3).

If the amounts paid at closing by the consumer exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer within 60 calendar days after consummation. See, § 1026.19(f)(2)(v).

 

Comments

[Michele Murphy]

So...under NO Tolerance would be appraisals? We disclose to the borrower (they are also not legally allowed to choose their own appraiser), but the appraiser charges more for a trip fee, unusual property, or has to go back due to something incomplete with the property. The change in fee is not allowed in the 10% tolerance, and if we don't have a 3 day heads up WE have to refund the fee difference to the borrower. Foolish. There are fees that the borrower is NOT allowed to choose the provider that the lender does not have control over. Do we simply over disclose on every borrower by hundreds of dollars on the small chance that one of those scenarios apply? How is that clarifying or simplifying this process for the borrowers. Folly.