"To Be or Not To Be": Par Value & TRID
Written by André B. Cotten, Regulatory Compliance Counsel, NAFCU
Hello, Compliance Friends! It's officially summer in DC, and I couldn't be more excited. Although, I would not mind being spared the humidity! Here at NAFCU we recently received an interesting question that I thought may be of interest to others out there in Compliance Land. Essentially, the question considers a scenario when a person is simultaneously applying for membership and a home loan. The credit union was interested to know whether the member's par value should be included in their TRID Loan Estimate and Closing Disclosure.
Par Value Equals Closing Cost?
To begin, it is unclear whether par value would be considered a "closing cost" requiring disclosure in the Loan Estimate and the Closing Disclosure. Unlike ordinary costs, the member borrower will retain the par value and may withdraw it at any time. Essentially the borrower would be paying the change to him or herself.
From reviewing Regulation Z, par value would not be an "origination charge" under paragraph 37(f)(1), nor a settlement service under paragraphs (f)(2) or (f)(3). Moreover, par value does not fit into the types of fees listed in subsection 37(g) – taxes or government fees, prepaids, or escrow payments. Paragraph (g)(4) allows for disclosing "other" amounts, but only if they are imposed by "someone other than the creditor or loan originator."
Looking to another part of Regulation Z, paragraph 18(r) requires the disclosure of "required deposits" for loans not subject to TRID. However, even this requirement specifically excludes amounts paid as a "requirement that a borrower be a customer or a member if that involves a fee or a minimum balance." 12 C.F.R. Part 1026 , Supp. I, comment 1026.18(r)-6.i. The preamble to the TRID disclosure stated that the "integrated disclosures do not contain a similar disclosure requirement."
Furthermore, the Bureau cited information overload as to why it decided not to include a requirement to disclose required deposits similar to paragraph 18(r):
"The disclosure required by current section 1026.18(r), which is not specifically required by TILA, is not a disclosure that the Bureau's research and consumer testing indicates is important to consumers in understanding their loans. Accordingly, to reduce the potential for information overload for consumers, the Bureau is not requiring the disclosure in sections 1026.37 or 1026.38." 78 Fed. Reg. 79787.
Although paragraph 18(r) does not refer to par value or membership fees, it is a close enough description that it seems the commentary excludes them, and the Bureau stated that these kinds of disclosures are unnecessary in the new integrated disclosures.
To confirm this understanding, the NAFCU Compliance Team obtained an informal, non-binding opinion from the Bureau that concurred it does not seem par values are required to be disclosed on the Loan Estimate or Closing Disclosure.
Where Could the Par Value Go?
Then, to take this analysis a step further, where, if any, would a credit union place the par value on the loan estimate and the closing disclosures if it decided to do so.
One place to consider putting the par value would be in the "prepaids section". However, section 1026.37(f) is intended to cover closing costs and other costs defined by the rule, which does not seem to include par value. Setting that aside, one possible issue with listing the cost in the prepaids section may be that Regulation Z has a limit of three prepaid items which can be listed on the form under paragraph 37(g)(2).
Further, prepaid items under Box F are included in the "Total Other Costs" calculation in Box I; the "Total Closing Costs" in Box J; and the "Calculating Cash to Close" table. Including items in Box F which the Bureau has stated were not intended to be included could result in a Cash to Close calculation that is a different number than what the regulation would have prescribed. And if the number is simply left out of the calculation of "Total Other Costs" in box I, then it may appear that the credit union was not including all costs.
Ultimately, whether to make disclosures that contravene the regulation and the Bureau's guidance would be a risk-based decision for the credit union to determine. As a potential solution to this type of dilemma, the credit union may consider attaching a cover letter to the forms to provide additional information about the transaction which does not appear to fit neatly into TRID's regulatory scheme.