Lender Credits: Disclosing and Good Faith

The TILA/RESPA Integrated Disclosure rule (TRID) delivered significant confusion about how to properly disclose lender credits and the good faith tolerance that applies. Essentially, three different types of lender credits exist.

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The first are general lender credits, not attributed to a specific charge, but lump sums credited towards the overall costs of the loan. Second are specific lender credits, which are for amounts attributed to a specific fee and most commonly seen in “no cost” loan scenarios. Last are lender credits used to reimburse the borrower for amounts that exceed tolerance.

Lender credits are always required to be disclosed regardless of whether they are general, specific or tolerance reimbursements. On the Loan Estimate, lender credits are not itemized, meaning that both general and specific lender credits will be aggregated together and will be disclosed in Section J. On the Closing Disclosure, things change a bit, and the three types of lender credits are treated differently. Specific lender credits attributed to a particular fee are simply disclosed in the same section that the fee was initially disclosed on the LE, but the portion of the fee being paid by the lender will be in the last column, designating it as “paid by others” with an “L” in parenthesis to denote that it was lender paid. Section J is for general lender credits not used toward specific fees and for lender credits issued to offset any charges that exceed tolerance.

But what happens if a lender discloses a lender credit for a specific fee and that fee later is reduced? Can the lender credit change? The answer is: It depends. Lender credits are subject to good faith just like any other fee disclosed on the Loan Estimate. Simply stated, the regulation considers a decrease in the lender credit to be an increase in charges to the consumer. This means a lender credit can only change if a valid change in circumstance occurs in connection with the fee directly tied to the lender credit initially disclosed. Remember, when such a changed circumstance occurs, in order to capture the ability to reduce the lender credit and reset the tolerance threshold, a lender must issue a revised disclosure within three business days of becoming aware of the changed circumstance event.

For example, let’s assume a lender runs a special promotion in which the lender offers to cover the cost of an appraisal, up to $500, which is the highest probable cost of an appraisal in the lender’s assessment area. The lender, after doing due diligence to determine an appraisal estimate for this particular transaction is in fact $500, would issue a Loan Estimate showing the appraisal fee of $500 in Section B. The Loan Estimate would also reflect a lender credit of $500 in Section J. Remember, general lender credits and specific lender credits are aggregated together in this section on the Loan Estimate. If the lender subsequently learns the appraisal fee will only be $425, a revised Loan Estimate must be issued within three days of learning of the changed circumstance in order to reduce the lender credit. Otherwise, it would result in an increased charge of $75 to the borrower because the lender credit is subject to zero tolerance, and thus, requires tolerance reimbursement. As of the 2018 amendment to the TRID Rule, a lender may also utilize the initial CD to reduce the lender credit and reset the tolerance threshold, but the lender must provide the CD within three business days of becoming aware of the changed circumstance (e.g. new information relative to the appraisal) just as if it were a revised Loan Estimate.

A lender also cannot simply remove a lender credit because a service is no longer required. Let’s assume a lender offers the same $500 lender credit for the appraisal and discloses it in Section J. If new information becomes available to the lender that alleviates the need for the appraisal, the lender must issue a revised LE (or initial CD) removing the appraisal fee and the corresponding lender credit within three days of learning of, and documenting, the valid change in circumstance. Remember, it’s not the removal of the appraisal fee that triggered the revised LE, it’s the reduction in the lender credit since the regulation considers this to be an increased charge to the borrower.

From a compliance and audit perspective, make sure you are aware of the promotions and fee waivers your lending department is offering. Review applicable Loan Estimates to ensure fees are still disclosed along with the corresponding lender credits, and not simply omitted from the disclosures altogether. And also verify that any reduction in lender credits between the Loan Estimate and Closing Disclosure were done pursuant to a valid change in circumstance, remembering to comply with documentation and timing requirements.

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