In finalizing new disclosure requirements for mortgage loans, the Consumer Financial Protection Bureau (CFPB) further restricted the tolerance levels between estimates and the final settlement charges. This amended "good faith determination" will require credit unions to closely review their current relationships and charges to ensure they stay within the new tolerance levels. Inaccurate estimates could result in large refunds to members at closing.
Three Tolerance Levels
As with the current rules, the new requirements provide for three tolerance categories: zero tolerance, 10% aggregate tolerance, and variations permitted. Importantly, the new requirements bring additional charges into the zero tolerance category—requiring credit unions to perform additional due diligence before providing members the Loan Estimate.
The new general rule—12 CFR 1026.19(e)(3)(i)—indicates that an estimated closing cost is in good faith if the amount paid by the member does not exceed the amount disclosed on the Loan Estimate. Fees and charges falling under this category include:
- Fees paid to the credit union;
- Fees paid to a mortgage broker;
- Fees paid to an affiliate of the credit union or the mortgage broker;
- Fees paid to an unaffiliated third-party if the credit union did not permit the member to shop for the service provider;
- Transfer taxes; and
- Lender credits.
Of particular note is the addition of fees to affiliates as well as fees paid by a member when they were not permitted to shop for the service provider. Under the current rules, these are both under the 10% tolerance levels.
10% Aggregate Tolerance
For certain fees and charges, the charges paid by the member can exceed the amount disclosed on the Loan Estimate by an aggregate of 10%. These include:
- Fees paid to an unaffiliated third-party if the credit union permitted the member to shop for the service provider; and
- Recording fees.
Importantly, the credit union must provide the member with a written list of available service providers clearly indicating the member may shop for a different service provider. Failure to provide a properly written list of service providers would result in these third-party fees being subject to the zero tolerance level.
Other fees or charges can increase if the estimate was based on the best information reasonably available at the time of the disclosure. Fees and charges that could fall under this category include:
- Prepaid interest;
- Property insurance premiums;
- Amounts placed into an escrow account;
- If chosen by the member, fees paid to third-party service providers not included in the written list; and
- Fees paid for non-required services chosen by the member.
One Charge, Three Possibilities
To demonstrate how the tolerance levels will impact credit union lending, consider the following:
If a member is not permitted to shop for a third-party service, the charge would be subject to the zero tolerance level. However, if the member was permitted to shop and the member chose a service provider from the written list, the charge would fall under the 10% aggregate threshold. Finally, if a member was permitted to shop for a third-party service and the member chose a provider that was not included on the written list of service providers, the charge could vary from the amount disclosed.
The tolerance levels in the new requirements are incredibly complex and present real consequences for credit unions. Credit unions should review their current fees and charges—and their current third-party relationships—to analyze which tolerance level will apply and the accuracy of their existing disclosures.