Overestimating Lender Credits
Happy Monday, compliance family! Let's make it a great week by starting off with a compliance blog about giving away money... more specifically, lender credits.
Many credit unions offer lender credits to reduce the closing costs of mortgage loans which makes it easier for members to purchase homes. Good job, credit unions! For some background about lender credits, see our previous blog on the topic.
Sometimes credit unions disclose that lender credits will cover a specific amount of closing costs, but the closing costs end up being less than estimated. In these situations, the credit union still owes the originally estimated amount of lender credits. How can this be? Why should the credit union owe the member money after trying to make the loan more affordable for the member? Regulation Z explains how this situation fits in with the good faith determination.
The amount of a lender credit may not decrease from the amount listed on the loan estimate. Section 1026.19(e)(3)(i) regarding the good faith determination indicates a reduction of lender credits is treated as an increase in closing cost to the member unless the charges are interest rate dependent. Even if the lender credits would exceed the amount of the closing cost, the regulation treats a reduction of the lender credits as a violation of good faith. This appears to be the rule whether the credits were general credits or specific to certain line items. The Commentary to section 1026.19(e)(3) explains this point, “…the actual total amount of lender credits, whether specific or non-specific, provided by the creditor that is less than the estimated “lender credits”[…] is an increased charge to the consumer for purposes of determining good faith under §1026.19(e)(3)(i).”
This means credit unions are not permitted to decrease the amount of general or specific lender credits, even if the closing costs decrease from the estimated amount. This is the case regardless of the fact that the member will end up paying $0 for any particular closing cost, or for all closing costs in general. The commentary to section 1026.19(e)(3) contains an example of this: “…if the creditor discloses a $750 estimate for “lender credits” to cover the cost of a $750 appraisal fee, but subsequently reduces the credit by $50 because the appraisal fee decreased by $50, then the requirements of §1026.19(e)(3)(i) have been violated because, although the amount of the appraisal fee decreased, the amount of the lender credit decreased.”
In order to reduce the risk of obligating themselves to pay more lender credit than the amount of closing costs, some credit unions use the lower amount from the range of estimated closing cost on the loan estimate. However, these credit unions are prepared to pay a higher amount if the closing costs are higher than the amount named in the loan estimate. This is because the good faith requirements allow a credit union to increase the amount of lender credits paid to cover closing costs that end up being higher than originally estimated.
The commentary to section 1026.19(e)(3) includes another example, “…if the creditor discloses a $750 estimate for “lender credits” identified in §1026.37(g)(6)(ii) to cover the cost of a $750 appraisal fee, and the appraisal fee subsequently increases by $150, and the creditor increases the amount of the lender credit by $150 to pay for the increase, the credit is not being revised in a way that violates the requirements of §1026.19(e)(3)(i) because, although the credit increased from the amount disclosed, the amount paid by the consumer did not.”
Another possible solution may be to send a revised estimate if, before closing, a credit union realizes the estimated lender credit will exceed the actual closing costs. Credit unions might rely on the requirements for sending a revised loan estimate under section 1026.19(e)(3)(iv). For the good faith determination, credit unions are able to rely on the amounts disclosed in a revised loan estimate, so long as a credit union has a valid reason to send a revised estimate. Valid reasons that may apply in this type of situation include changed circumstances affecting settlement charges, revisions requested by the member, and interest rate dependent charges. For more information about sending revised loan estimates, check out a few more NAFCU blogs, TILA/RESPA – Revised Loan Estimates and TRID: Issuing Revised Loan Estimates While Within the Tolerances; July NCUA Report Available.
About the Author
Loran Jackson was named regulatory compliance counsel in April 2019. In this role, Jackson helps NAFCU members with a variety of federal regulatory compliance issues.