Written by Brandy Bruyere, Director of Regulatory Compliance
A couple of weeks ago, I blogged on a couple of questions from last month’s TRID webcast and promised we’d do a little more. I know you’ve all been waiting anxiously for me to do this because who does not love starting their day with TRID? Just in case, for those of you wondering:
It sure was, I know TRID is not fun, but if it will help some folks out, then believe it or not, I’m happy to blog about it. So back to this webcast...
The rules permit the use of an alternative Loan Estimate in transactions without a seller but this has caused some confusion for how to handle some items in a refinance loan. One question the CFPB answered during the April webcast dealt with disclosing the amounts from an escrow account that the member has as part of their existing loan that will be used to fund the escrow account for the new (refinanced) loan. According to the Bureau, there are two possible ways to disclose this on a Loan Estimate:
“When a consumer pays a mortgage loan in full, several things can happen to the amount remaining in an escrow account. This question asks about one specific scenario. The creditor in a refinance transaction uses a balance in the escrow account associated with the prior loan to fund the escrow account associated with the new loan. In other words, the balance is transferred. Generally, this scenario might arise when the creditor on the prior loan and the creditor on the new loan are the same entity and when the loan is being held within the creditor's portfolio. The rule does not explicitly address how to disclose the transferred escrow balance using the alternative forms. So a creditor using those forms has some flexibility in determining how to disclose the transferred escrow balance.
Today we will discuss two possible ways to disclose the transferred escrow balance on the alternative Loan Estimate. The creditor should keep in mind that, depending on the circumstances and particulars of the transaction, there may potentially be additional ways of accurately reflecting this transaction. While we will discuss two acceptable methods today, we can't address every potentially acceptable disclosure method in every scenario. Creditors will have to determine whether a particular method of disclosure is appropriate under the facts and circumstances of a specific transaction in accordance with applicable provisions of the rule. Turning back to the question.
First, a creditor using the alternative Loan Estimate may disclose a transferred escrow balance as a separate item in [the rule] for the initial escrow payment at closing, which appears on page 2. Under section 1026.37(g)(3), a creditor must disclose an itemization of the amounts that the consumer will be expected to place into a reserve or escrow account at consummation to be applied to recurring periodic charges. In the scenario we're discussing, the creditor places the transferred escrow balance into a reserve or escrow account at consummation, and that amount is to be applied to recurring periodic charges. Accordingly, the transferred escrow balance may be disclosed as a separate item in [the rule]. Note, however, that the dollar figure should be disclosed as a negative number because the transferred funds are essentially a credit to the consumer. That is, they reduce the amount the consumer must pay at consummation.
The second way that a creditor may disclose a transferred escrow balance on the alternative Loan Estimate is by factoring the balance into the "Estimated Payoffs and Payments" row of the "Alternative Calculating Cash to Close" table, which appears on page 3. Under section 1026.37(h)(2)(iii), the "Estimated Payoffs and Payments" row includes the total amount of payoffs and payments to be made to third parties not otherwise disclosed under section 1026.37(f) and (g) disclosed as a negative number. In the scenario we're discussing, the transferred escrow balance offsets the total amount of payoffs and payments and therefore reduces the amount the consumer must bring to closing. So assuming the creditor has not already disclosed the transferred escrow balance as an initial escrow payment at closing in section 37(g), it may treat the transferred escrow balance as a credit to the consumer for purposes of calculating the estimated payoffs and payments. Under this option, the transferred escrow balance will not appear as a separate line item on the alternative Loan Estimate. Please note that the scenario we've been discussing differs from the common scenario in which the existing loan payoff amount is reduced by the amount of funds currently held in escrow. It also differs from the scenario in which the consumer simply receives a check for the balance in the escrow account associated with the prior loan. In both of these scenarios, there is nothing for the creditor in a refinance transaction to disclose on the Loan Estimate or the Closing Disclosure regarding the escrow balance associated with the prior loan. This is true whether the refinance creditor is using the standard forms or the alternative forms.”
The CFPB went on to tease out a few more details on this that are specific to the Closing Disclosure, noting that like with the Loan Estimate, there is some flexibility for credit unions and two ways to make this disclosure, depending on the terms of the underlying legal obligation:
“The first way is in section 1026.38(g) for the initial escrow payment at closing on page 2 of the alternative Closing Disclosure. This approach is similar to the first alternative Loan Estimate option we discussed in question 10. Note again, however, that the dollar figure associated with the balance should be disclosed as a negative number because the funds actually reduce the amount the consumer must pay at consummation.
The second way a creditor may disclose a transferred escrow balance on the alternative Closing Disclosure is to include a separate entry in the "Payoffs and Payments" table on page 3 of the alternative Closing Disclosure. Under section 1026.38(t)(5)(vii)(B), the Payoffs and Payments table itemizes the amounts of payments made at closing for other parties from the credit extended to the consumer or funds provided by the consumer in connection with the transaction. In our scenario, as we discussed in question 10, the transferred escrow balance offsets the amount of payoffs and payments made at closing to other parties. The transferred escrow balance operates, in effect, as a credit and reduces the cash the consumer needs to close. Accordingly, the balance may be disclosed as a negative number in the "Payoffs and Payments" table. Note that the entry must include the payees and the description of the purpose of the disbursement, as required by section 1026.38(t)(5)(vii)(B).”
Speaking of TRID, in case you missed it, on April 28 CFPB Director Richard Cordray sent a letter announcing that the Bureau is working on a proposed rule to consider "adjustments" that "would be useful for greater certainty and clarity." Director Cordray hopes to issue this proposal in late July. The full letter can be found here: TRID Letter NPRM
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