Back to Basics: Shopping for Settlement Service Providers (Part 2)
In Part 1 of this blog, I discussed how to determine if a credit union has permitted the member to shop for a settlement service provider under section 1026.19 of Regulation Z, and how that determination will affect disclosures on the loan estimate. In this blog, we’ll examine how that determination will affect how much the fees disclosed on the loan estimate may change by the time the borrower is actually charged and a closing disclosure is provided.
So what if the estimated charges for a certain settlement service changes after the loan estimate is provided? That’s where tolerances come in. The tolerances determine how much deviation is allowed between what was estimated on the loan estimate, and what the member actually ends up paying (as accurately reflected on the closing disclosure). For more information on tolerances, see this previous post in the NAFCU Compliance Blog.
The general rule (found in section 1026.19(e)(3)(i)) is to provide what is known as “zero tolerance” – meaning that the charge eventually disclosed on the closing disclosure cannot exceed what was originally disclosed on the loan estimate – no increase is allowed. The staff commentary provides examples of fees subject to this “zero tolerance” rule, which include “[f]ees 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” (emphasis added). The general idea with the “zero tolerance” rule is that fees that a credit union charges, or which are charged by the service providers that the credit union requires members to use, should be known to the credit union and therefore should not change from the time of the loan estimate to the closing disclosure. An increase in charges subject to the zero tolerance rule would violate the “good faith” standard required for the loan estimate.
10 Percent Tolerance
The second category of tolerances allows for charges to increase above the figures provided in the loan estimate, but caps the amount of acceptable increase. This should be calculated by looking at the aggregate amount of such charges in the loan estimate, and the aggregate amount of the same type of charges in the closing disclosure – an increase of no more than 10 percent is allowed. The provision specifically states that this tolerance applies when “[t]he [credit union] permits the [member] to shop for the third-party service.”
Finally, the third tolerance category (found in section 1026.19(e)(3)(iii)) is what is known as the “no tolerance” category – not to be confused with the “zero tolerance” category discussed above. The “no tolerance” category means that no tolerance applies – i.e. the estimate provided will be considered to have been made in good faith regardless of how much the fee ends up increasing from the time of the loan estimate to what the consumer eventually ends up paying, so long as the estimate was made “consistent with the best information reasonably available to the creditor at the time it [was] disclosed…” Section 1026.19(e)(3)(iii) provides a list of fees that fall into this category, which illustrates that the category generally covers fees that the credit union would not be able to predict or over which the credit union has no control.
Importantly, comment 3 of the Staff Commentary to section 1026.19(e)(3)(ii) says that if the member chooses from a list provided to them by the credit union, or does not select a service provider (allowing the credit union to select it for them), then the 10 percent tolerance applies. However, that comment also states that if the member chooses a service provider that is not on the list provided by the credit union, then the estimated fee for that service will be subject to the “no tolerance” category. This is consistent with the rationale for the “no tolerance” category described above – if the credit union did not select or suggest the service provider, then the credit union might not be able to make an accurate estimate of the fees charged by that service provider, so more flexibility is warranted.
Here is a chart that lays out the tolerances and how the member’s ability to shop affects their application:
Service for which member is not permitted to shop
The loan estimate will be in violation of the good faith standard if the actual fee charged (and disclosed on closing disclosure) exceeds what was disclosed on loan estimate by any amount.
Service for which member is allowed to shop, and the member selects a provider from the list provided by credit union (or doesn’t select one, allowing the credit union to choose for them)
10 percent tolerance
Aggregate of all fees in this category that are actually charged to member is allowed to exceed the aggregate of the estimates of such fees on the loan estimate by up to 10 percent.
Service for which member is allowed to shop, and member selects provider not on the list
There is no applicable tolerance. Actual fees charged may exceed the estimated fees on the loan estimate by any amount, and loan estimate will still be considered made in “good faith” so long as the estimate was consistent with the “best information reasonably available” to the credit union.
If the applicable tolerance is exceeded, then a tolerance violation results. Section 1026.19(f)(2)(5) provides that a tolerance violation can be cured if the credit union, within 60 days, refunds the amount in excess of the tolerance and provides corrected disclosures. Credit unions may want to review their current practices to make sure they are catching possible tolerance violations and correcting them to avoid regulatory or contractual liability.
About the Author
Nick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.