We Listened So You Don’t Have To: Know Before You Owe Mortgage Disclosure Rule – Construction Lending Webcast, Part 2 of 2

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

On March 2, we blogged about the CFPB’s TRID Construction Lending webcast and the clarification it provided regarding disclosure of construction holdbacks. We also promised to tell you  about additional lessons we learned.

Guidance Regarding Estimating Unknown Fees and Costs During the Draw Period

NAFCU has received member questions about how credit unions are supposed to estimate draw fees and inspection costs which may arise during the draw period. Often these are unpredictable and rely on the pacing of construction. While the CFPB did not offer a concrete response, they did give guidance on estimating these fees that is a little more based in fact that what we have had previously. The webcast posed this question:

“Q25: How does a creditor disclose inspection and draw fees when the creditor does not know how many draws there will be?”

The CFPB’s analysis is still a good faith analysis; no surprise there. Under section 1026.19(e)(1)(i), costs estimated on a loan estimate must be made in good faith:

Ҥ1026.19 Certain mortgage and variable-rate transactions.

(e) Mortgage loans secured by real property—early disclosures—

[…]

(1) Provision of disclosures—

[…]

(i) Creditor. In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.”

The commentary to section 1026.19(e)(1)(i) defines good faith with regard to Loan Estimates by referencing section 1026.17(c)(2)(i) and its commentary. According to comment 19(e)(1)(i)-1, good faith requires that where information necessary for an accurate disclosure is unknown, the credit union makes disclosures based on the best information reasonably available to it at the time. The information “reasonably available” at the time is the information obtained after an exercise of due diligence by the credit union to determine the fee. Comment 19(e)(1)(i)-1 also specifically references comment 17(c)(2)(i)-1 for further explanation of the standard. The text of comment 17(c)(2)(i)-1 is below:

“Paragraph 17(c)(2)(i)

1. Basis for estimates. Except as otherwise provided in §§1026.19, 1026.37, and 1026.38, disclosures may be estimated when the exact information is unknown at the time disclosures are made. Information is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor 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. The creditor may utilize estimates in making disclosures even though the creditor knows that more precise information will be available by the point of consummation. However, new disclosures may be required under §1026.17(f) or §1026.19. For purposes of §1026.17(c)(2)(i), creditors must provide the actual amounts of the information required to be disclosed under §§1026.37 and 1026.38, pursuant to §1026.19(e) and (f), subject to the estimation and redisclosure rules in those provisions.” (Emphasis added.)

The comment provides some good factual examples of due diligence, none of which are on point for a construction scenario…which brings us to the central question: What is due diligence for estimating these unpredictable construction-related fees?

In the webcast, the CFPB suggested credit unions base their estimates of these construction-related fees on previous transactions that were similar in terms of structure and scope. Hopefully, by using previous transactions as a benchmark, credit unions can feel a little more comfortable that their estimates in the LE are reasonable, good faith estimates. Of course, these estimates have further significance for a credit union; they matter in the context of the good faith determination of the Closing Disclosure. But, unfortunately, the webcast did not cover the Closing Disclosure. We will have to wait for further guidance from the CFPB regarding the other half of TRID.

The webcast will be posted here once it is available. If you wish to check out the webcast yourself, I strongly recommend reviewing the presentation slides for questions of particular interest, and then fast-forwarding to that slide for further explanation.