As the industry wraps up the first six months of the Truth-in-Lending RESPA Integrated Disclosure (TRID) roll-out, TENA has spotlighted several key items that have been repeatedly identified as issues and several gray areas where clear company policy can significantly reduce errors on the new disclosure forms.
Similar to the errors identified with the Good Faith Estimate, having a well-documented file is key to reducing potential issues. Some of the most frequently noted issues relate to supporting documentation that is missing or incomplete. TENA frequently finds revised Loan Estimates that reflect increases to fees; however, documentation evidencing a changed circumstance is not found. Another frequent error relates to fees increased on revised Loan Estimates that are not related to the documented changed circumstance. For example, an appraisal fee will be increased on a revised Loan Estimate; however, the changed circumstance is due to the rate being locked.
If the loan closes prior to six precise business days from the date the Closing Disclosure was sent, the file documentation should reflect the date the borrower(s) received the disclosure. The regulation indicates that the Closing Disclosure must be provided to the borrower(s) a minimum of three precise business days prior to the consummation of the transaction. If there is no evidence of a receipt date for the Closing Disclosure, then the only “safe harbor” of elapsed days that would meet all the disclosure requirements is when six (6) or more precise business days have elapsed between the time when the Closing Disclosure was sent to the borrower and the consummation date of the transaction. (The regulation requires that 3 precise business days are allowed for delivery to the borrower if placed in the mail.) As a result, if there is no evidence of the date the borrower(s) received the Closing Disclosure, an audit exception is created any time the elapsed days between the generation of the Closing Disclosure and the actual closing date is less than 6 precise business days in duration. So if the borrower receives it face-to-face, through an email or via overnight mail, make sure that this is documented in the file to show evidence that closing can occur three precise business days from the receipt date instead of waiting the 6 precise business days from when the disclosure was sent.
A variety of errors regarding the labeling of fees on the Loan Estimate and Closing Disclosure are also frequently noted, with a preponderance of issues related to the labeling of Title related charges. The improper labeling of title charges has a compounding effect in that not only is it a violation of CFPB requirements, but failure to properly label these fees exacerbates the problem of tracing them from the initial Loan Estimate to revised Loan Estimates and the Closing Disclosure.
The regulations require that all title related fees be labeled with the same prefix so that they are grouped together, are easily identifiable and are then properly alphabetized on the documents. They should all begin with the prefix “Title-”. Fulfilling this requirement will not only meet the letter of the regulations, it prevents a variety of audit related issued that ensue when the labeling is haphazard. For example, if the initial Loan Estimate reflected a lump sum for Title Fees that was later itemized on a revised Loan Estimate and the lender did not label the revised Loan Estimate itemizations with “Title”, the auditor is unable to determine that the itemization had been previously included as part of the Title lump sum. The addition of a new fee without a disclosed service provider may cause an audit exception to be cited for a tolerance issue on a single fee, when the tolerance limits would otherwise have been respected had the fee been included in the Title Fees grouping.
The following are a list of some of the potential issues that can stem from missing and/or incomplete documentation in files:
Issue #1: The Loan Estimate was redisclosed (thereby moving the baseline for determining the tolerances) yet a valid reason justifying the redisclosure was not documented in the file.
The Rule: The CFPB staff commentary states that Good Faith is determined by calculating the difference between the estimated charges originally provided on the Loan Estimate and the actual charges paid by or imposed on the consumer. However, the creditor may use a revised estimate of a charge instead of the amount originally disclosed on the Loan Estimate if the revision is due to one of the permissible reasons for redisclosure of the Loan Estimate. http://www.consumerfinance.gov/eregulations/1026-19/2015-18239#1026-19-e-3-iv
The Problem: How to determine if the reason was permissible if it’s not documented in the loan file, which calls into question whether the fees from the original Loan Estimate or the revised Loan Estimate should be compared to the Closing Disclosure. In this circumstance the TRID guidelines are clear that one or more violations have occurred but it’s not clear precisely what violation (or how many) should be cited. For example, there are three possible outcomes to a singular error of this nature:
- Assume there was a permissible purpose for the redisclosure that was not documented in the loan file. Under that circumstance the movement of the baseline would be correct; however, an audit exception would be cited for failing to properly document the permissible purpose.
- Assume there was not a permissible purpose for the redisclosure. Under that circumstance an audit exception would be cited for exceeding permissible tolerances as a result of not being able to move the baseline.
- Assume there was not a permissible purpose for the redisclosure. Technically, in that circumstance there are two violations of the guidelines so it’s feasible to cite two audit exceptions. The first exception would be for failure to document a permissible reason for redisclosure and the second would be for moving the baseline in violation of the guidelines.
Issue #2: Evidence of a rate lock was found in the file without a corresponding redisclosure of the Loan Estimate.
The Rule: The regulation requires that a revised Loan Estimate be provided to the borrower no later than three (3) business days after the date the interest rate is locked. http://www.consumerfinance.gov/eregulations/1026-19/2015-18239#1026-19-e-3-iv-D
The Problem: The regulation does not specifically require a lock-in agreement; however, the example provided in the Staff Commentary refers to a lock-in agreement. Numerous lenders have indicated that their interpretation regarding this matter is that a redisclosure is not required unless an actual rate lock agreement has been signed.
After considerable review and evaluation, TENA has concluded that the intent of the regulation is to provide the borrower with a revised Loan Estimate whenever there is any evidence of a borrower rate lock. Examples include, but are not limited to, a signed rate lock, reference to a rate lock through such things as an email, a call log, or some other documented communication.
Issue #3: Tolerance violations when comparing fees on the Loan Estimate to fees on the Closing Disclosure due to the rounding requirements specified by the CFPB. To date, approximately 30% of all tolerance issues found by TENA are attributable to problems introduced by the mandated fee rounding protocol that is applied to the Loan Estimate.
The Rules:
- The CFPB regulation specifies that certain fees disclosed on the Loan Estimate must be rounded to the nearest whole dollar. http://www.consumerfinance.gov/eregulations/1026-37/2015-18239#1026-37-o-4
- The CFPB has specified that the fees on the Closing Disclosure must be exact and not rounded. http://www.consumerfinance.gov/eregulations/1026-37/2015-18239#1026-37-o-4
- CFPB guidelines provide zero tolerance for certain fees on the Closing Disclosure exceeding the fee amount listed on the Loan Estimate. http://www.consumerfinance.gov/eregulations/1026-19/2015-18239#1026-19-e-3-i
The Problem: When comparing the two numbers for zero tolerance fees, TENA’s auditors have found many fees that trigger tolerance violations appear to be a result of rounding down to the nearest whole dollar on the Loan Estimate. For example, a credit report fee anticipated to be $24.45 must be rounded down and shown as $24 on the Loan Estimate. However on the Closing Disclosure, if the actual charge was $24.45, it must be listed as $24.45.
Technically, this fee is in violation of the CFPB’s third requirement of zero tolerance for any increase. To overcome this problem, the CFPB has provided an official interpretation which allows for the use of unrounded numbers when conducting the good faith analysis related to fee tolerances.
“Use of Unrounded Numbers. Sections 1026.37(o)(4) and 1026.38(t)(4) require that the dollar amounts of certain charges disclosed on the Loan Estimate and Closing Disclosure, respectively, to be rounded to the nearest whole dollar. However, to conduct the good faith analysis required under § 1026.19(e)(3)(i) and (ii), the creditor should use unrounded numbers to compare the actual charge paid by or imposed on the consumer for a settlement service with the estimated cost of the service.” http://www.consumerfinance.gov/eregulations/1026-Subpart-C-Interp/2013-28210#1026-19-e-3-i-Interp-6
For this provision to be relied upon during the processing, underwriting and subsequent audit of a loan transaction, separate documentation must be maintained in the loan file that establishes the pre-rounded value of the fees listed on the Loan Estimate.
Issue #4: Undated and/or incomplete Loan Estimates or Closing Disclosures found in the file.
The Problem: Many disclosures are missing the issue date and/or substantial pieces of required information and there is no evidence that they were ever provided to the borrower. Under those circumstances, if it were assumed that such an incomplete disclosure document was provided to the borrower (when in fact it had not been provided to the borrower), then significant problems with the audit would be introduced. Conversely, if such a document was actually provided to the borrower but the auditor did not include it in the audit, then significant problems would again be introduced. Either way, the auditor has to “guess” if the incomplete document was used.
The key to preventing many of the issues listed in this article is to maintain complete documentation, establish clear and concise procedures around some of the gray areas, and scrupulously follow-up on issues identified during the pre- and post-closing audit functions so that they do not reoccur.
For more information on how TENA can help your firm navigate through complex regulatory rules, contact us at sales@tenaco.com.
Note: TENA’s Compliance/Legal Division will present its rationale or reasoning behind any statutory or regulatory matter related to TENA’s product lines; however the information and answers received from this process should not be construed as, nor are they intended to constitute legal advice or counsel.
