Source: https://www.rskcompliance.com/2015/07/
Timestamp: 2019-04-24 14:39:55+00:00

Document:
The Bank asks whether it is required under the new TRID rules to disclose the cost of the borrower’s attorney in the Loan Estimate. If it is included, how would it best be handled?
If it is customary for consumers in the jurisdiction where the property is located to be represented by an attorney, the Bank should treat the fee of the consumer’s attorney as being, in effect, a Bank-required charge. If the Bank wishes to have the benefit of the 10 percent cumulative tolerance for charges by service providers it requires, it must allow the consumer to shop for the consumer’s attorney. In such case, the estimate of the attorney’s fee would appear in the Loan Estimate in “Services You Can Shop For” and a written list of service providers would be given to the consumer at the time of the Loan Estimate In choosing an attorney for the list, the Bank would consider such factors as the attorney’s experience in handling residential real estate transactions. If the consumer chooses an attorney on the list, the attorney’s fee would fall within the 10 percent cumulative tolerance for such charges. If the consumer chooses an attorney not on the list, the fee of this attorney would not be subject to a tolerance limitation.
In closed-end mortgage transactions other than reverse mortgages, the Truth-in-Lending Real Estate Settlement and Procedures Act Integrated Disclosure (“TRID”) Rules require a lender to provide the consumer with a Loan Estimate disclosing the fees and charges associated with a loan, including loan costs. Generally, “loan costs” are those costs paid by the consumer to the bank or third party providers of services the lender requires the consumer to obtain. Other costs include taxes, governmental recording fees, and other fees and charges associated with the real estate closing process. 12 CFR §1026.19(e)(3)(iii).
Lenders are responsible for ensuring that the figures stated in the Loan Estimate are made in good faith and consistent with the best information available. Such charges are considered to have been given in good faith if they do not exceed the prescribed tolerance for such charges. There is a 10 percent cumulative tolerance for charges paid to third parties for required services, zero tolerance for such charges as the loan origination fee or transfer taxes, and charges for which no tolerance restriction applies. 12 CFR §1026.19(e)(3)(ii).
The general rule is that if the charge imposed on the consumer at closing exceeds the amount disclosed in the Loan Estimate by the allowed tolerance factor, it will not be deemed to have been made in good faith, regardless of the basis for the estimate. It will only be considered to have been made in good faith to the extent the lender charges the consumer no more than what was disclosed, together with the tolerance factor. §1026.19(e)(3)(i) & (ii).
A lender can charge the consumer more than was disclosed on the Loan Estimate, or not disclosed at all, but only if the original estimate was based on the best information reasonably available to it. 12 CFR §1026.19(e)(3)(iii).
In this case, the Bank asks how the charges for a consumer’s attorney should be disclosed. We will assume that the consumer’s attorney is providing personal counsel to the consumer and is not the closing attorney, which would be considered a lender-required charge. Since the Bank would not have required the consumer to have obtained counsel, would this fall under one of the exceptions? If so, would it have to be disclosed only to the extent the Bank was aware at the time of the Loan Estimate that the consumer was going to obtain the services of his own legal counsel?
The answers to these questions turn upon a question of fact. As per the official commentary, if the subject property is located in a jurisdiction where a consumer is customarily represented at closing by his own attorney, even though it is not a requirement, and the Bank fails to include a fee for the consumer’s attorney, or includes an unreasonably low estimate for such a fee, then the Bank’s failure or underestimation would not comply with the requirements of the TRID Rules. Official Interpretations, ¶1026.19(e)(3)(iii)-3.
This means that, if the customs of the jurisdiction where the property is located are such that a consumer would probably be represented by counsel, the Bank will have, in effect, required the consumer to obtain counsel by making a loan in that jurisdiction. While the plain wording of the regulation suggests otherwise, the interpretation of that wording by the commentary is so clear that the prudent practice of the Bank in addressing it should be to treat the fee of the borrower’s attorney as a charge it requires, whenever this conforms to the customary usage of the jurisdiction in which the property is located.
The Bank believes that a loan it closed may be out of tolerance with respect to its GFE disclosures and the closing costs reflected in the HUD-1 Settlement Statement. It asks for the GFE and HUD-1 to be reviewed and whether a refund should be made to the customer.
The HUD-1 Settlement shows transfer taxes of $990, although none were indicated on the GFE. It also shows an appraisal fee of $395, while the GFE indicated a fee of $350, and government recording fees of $99 when the GFE showed fees of $84.
The disclosure of the transfer taxes is subject to zero tolerance, that of the appraisal and recording fees, to a tolerance of 10 percent for the aggregate of the charges with which they are included.
In order to cure the tolerance error for the transfer taxes, the Bank must reimburse the borrower with a sum of $990 for the transfer taxes and $15 for the appraisal and recording fees, for a total of $1,005, the amount by which the charges at settlement exceeded the tolerance for those disclosed in the GFE.
The Good Faith Estimate of Settlement Costs (“GFE”) shows no transfer taxes in Block 8, an appraisal fee of $350 in Block 3, and recording fees of $84 in Block 7. As reflected on the HUD-1 Settlement Statement dated July 10, however, a charge of $990 was made for transfer taxes and charges of $395 and $99 were made for the appraisal and recording fees.
The purpose of the GFE is to provide an estimate of settlement charges a borrower is likely to incur, as a dollar amount, and related loan information. It is considered to be in good faith if the charges it discloses do not exceed the tolerance allowed by RESPA. “Tolerance” means the maximum amount by which the charge for a category or categories of settlement costs may exceed the amount of the estimate for such category or categories on a GFE. 12 CFR §1024.2(b).
On the GFE, the amount the borrower is likely to pay for transfer taxes is disclosed in Block 8. The amount of transfer taxes cannot change at settlement from those disclosed in the GFE, absent changed circumstances. 12 CFR §1024.7(e)(iv); HUD, New RESPA Rule FAQs, GFE – Block 8, 1 & 2.
A 10 percent tolerance is allowed for the sum of the prices of each service listed in Block 3, Block 4, Block 5, Block 6, and Block 7, if the loan originator requires the use of a particular provider or the borrower uses a provider selected or identified by the loan originator, again barring changed circumstances. 12 CFR §1024.7(e)(2). Assuming that the borrower was allowed to choose the title services in Block 5 and the owner’s title insurance in Block 6, the 10 percent tolerance would apply to the aggregate of the fees disclosed in Blocks 3 and 7. These total $450, compared to the actual charges totaling $510 in the HUD-1.
If any charges at settlement exceed the charges listed on the GFE by more than the prescribed tolerances, the loan originator may cure the tolerance violation by reimbursing the borrower the amount by which the tolerance was exceeded, either at settlement or within 30 calendar days after settlement. A borrower will be deemed to have received timely reimbursement if the loan originator delivers or places the payment in the mail within 30 days after settlement. 12 CFR §1024.7(i).
In this case, the transfer taxes collected at settlement exceed those disclosed in the GFE by $990. The amount of this particular charge subject to cure, therefore, is $990.
With respect to the appraisal and recording fees, the 10 percent tolerance would by $45, meaning that the charges at settlement could not exceed $495. The aggregate amount charged at settlement for these services was $510, meaning that the cure would be a reimbursement of $15.
The total reimbursement in this case would be $990 plus $15 or a total of $1,005. Such reimbursement should have been made within 30 calendar days of the settlement.
As noted above, if changed circumstances result in increased costs for any settlement services such that the charges at settlement would exceed the tolerances for those charges, the loan originator may provide a revised GFE to the borrower. “Changed circumstances” include such matters as “Acts of God”; information particular to the borrower or the transaction that was relied upon in providing the GFE that changed or was found to be inaccurate after the GFE was provided; and other circumstances that are particular to the borrower or transactions, such as boundary disputes or the need for flood insurance. Borrower-requested changes may also justify a revised GFE being issued. 12 CFR §1024.2(b); 7(f)(3).
In order to be effective, however, the revised GFE must be issued within three business days of the loan originator learning of the changed circumstances or within three business days of the borrower’s request. 12 CFR §1024.7(f)(1); (f)(3). If the Bank in this case did not issue a revised GFE in response to changed circumstances or the borrower’s request within that time period, it is too late to do so now.
The Bank has a loan to purchase a mixed-use property. In determining whether such loan is HMDA-reportable, the Bank would typically first use the income test then use the square footage test, if necessary. This particular loan has two retail spaces, one of which is currently leased for $22,920 annual rent and the second of which is vacant but has a proposed annual rent of $69,036. The two apartments each have annual rent of $17,400. As one commercial space is empty, the Bank referred to the square footage test, for which commercial use is 7,663 sq. ft. and residential use is 2,900 sq. ft. The Bank asks whether it should still include the square footage for the vacant commercial space.
The Bank is allowed to use any reasonable standard in determining the primary purpose of a multi-use building, such as income generated or square footage. The standard can be applied on a case-by-case basis. In this instance, the Bank should apply its standard based on the nature or purpose of the spaces, and determine the primary purpose of the building based on what income would be generated if the spaces were used as intended, or what square footage there is devoted to commercial or residential space. If a space is not occupied, the only question as to the income-value assigned to it would be whether the asked-for rent was reasonable or had been determined arbitrarily.
Under the Home Mortgage Disclosure Act, a “home purchase loan” is defined as a dwelling-secured loan used to purchase property primarily for residential purposes.
In determining the primary function of a property, a bank can utilize any reasonable standard, such as the square footage or income generated by a particular use. The appropriate standard to apply can be selected on a case-by-case basis. Official Commentary to Regulation C, ¶1003.2, Home purchase loan, 2.
In this case, the Bank has adopted the standard of first using the income generated and then the square footage, if the income generated does not provide a satisfactory answer. This would appear to be reasonable and in line with the Official Commentary. The question, however, is how it should be applied.
On the face of it, the primary purpose of the property would be commercial under either the income-generated or square footage standard, but this assumes that the standard would be applied to a space on the basis of its essential nature, whether or not it is occupied or producing income. This would seem to be the most reasonable application of the standard, since a space will have a particular quality or purpose, whether or not it is actually being used.
For example, if an apartment building had a small delicatessen on the ground floor and none of the apartments had been rented out yet, would the primary purpose of the building be determined by the delicatessen, which is generating income, or by the apartments, which are not?
Or if the Empire State Building had been renovated and all its commercial space was vacant but there was a small apartment for the janitor, which was occupied and producing income, would a loan to purchase the Empire State Building be properly characterized as a home purchase loan?
The Bank should apply its standard based on the nature or purpose of the spaces, and determine the primary purpose of the building based on what income would be generated, if the spaces were used as intended, or what square footage is devoted to commercial or residential space. If a space is not occupied, the only question as to the income-value assigned to it would be whether the asked-for rent was reasonable or had been determined arbitrarily.
Of course, whenever HMDA does not provide a clear and unambiguous answer to a problem, the Bank must select an approach, have a rationale for it, and apply it consistently.

References: §1026
 §1026
 §1026
 §1026
 §1024
 §1024
 §1024
 §1024
 §1024
 §1024