Compliance Blog

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Many NAFCU members have emailed the Regulatory Compliance Team about which TRID tolerance applies to pre-paid property taxes, HOA dues and condominium fees. The answer has been. There's a controversy about that.

In order to clarify the question, on February 10, 2016, the CFPB issued an amendment the 2013 Preamble to the TRID rules. It added the word not where it should have been. They did not amend the rule itself or its commentary.

Between the Preamble to the amendment, which clarifies the CFPB's position, and the correction itself, the CFPB has now provided enough winks and nudges that credit unions can feel secure that taxes, HOA dues and condominium fees are probably not subject to any tolerances. Of course, that's not a substitute for a clearly written rule.

The Problem

The good faith determination in TRID sets a general rule of zero tolerance for any increase in closing costs between the Loan Estimate and the Closing Disclosures. See 12 C.F.R.  1026.19(e)(3)(i). Any increase beyond the tolerance must be cured, i.e. paid out of the lender's pocket, to avoid a bad faith violation. The regulation identifies several specific types of charges are either subject to a tolerance of 10% increase or are subject to no tolerance at all, meaning any increase is acceptable. See section 1026.19(e)(3)(ii)-(iii).

According to 19(e)(3)(iii), the charges not subject to any tolerance at all include:

1. Prepaid interest;
2. Property insurance premiums;
3. Amounts placed into an escrow impound, reserve, or similar account;
4. Charges paid to third-party service providers selected by the consumer that are not on the list provided; and
5. Charges paid for third-party services not required by the creditor. These charges may be paid to affiliates of the creditor.

Conspicuously absent from this list is property taxes that must be paid at closing but are not being paid into an escrow account, HOA fees and condominium fees. Because these amounts are not included in either the list of charges subject to 10% tolerance charges or the list of charges not subject to a tolerance at all, they were technically subject to a 0% tolerance under the rules as written.

There was no clarifying information in the commentary, but the 2013 Preamble stated:

The final rule also mirrors current Regulation X in that property insurance premiums, property taxes, homeowner's association dues, condominium fees, and cooperative fees are subject to tolerances whether or not they are placed into an escrow, impound, reserve, or similar account.

As written, the statement inaccurately describes Regulation X, as it does not subject these amounts to tolerances, and the CFPB's own rule. Further, as written, the Preamble appears to confirm that prepaid property taxes, HOA fees and condominium fees should be subject to tolerances.

Reportedly, the CFPB informally told institutions that the Preamble should have said are not subject to tolerances, but a typographical error was made. It also stated informally that it viewed these amounts as charges paid for third-party services not required by the creditor. Not surprisingly, many institutions questioned what lender would not require full payment of property taxes, HOA fees or condominium fees on collateral before making a loan secured by that collateral.

Nonetheless, most credit unions were put into a position of either following unofficial, informal guidance reported through third-parties or following the letter of the regulation and paying to cure violations where taxes, HOA fees and condominium fees were under-reported at the time of the Loan Estimate.

The Fix

To fix this problem, the CFPB declined to add an additional category of fees not subject to tolerance under section 1026.19(e)(3)(iii) or to add commentary clarifying that property taxes, HOA fees and condominium fees are examples of third-party services not required by the creditor. Instead, it chose to amend the 2013 Preamble to add the word notwhere it should have been. The result is that the 2013 Preamble correctly states the CFPB's intention that these amounts should not be subject to any tolerance, as is the case with Regulation X.

More importantly, the Preamble to the correction clearly identifies these amounts as charges paid for third-party services not required by the creditor, and therefore not subject to any tolerance:

Section 1026.19(e)(3)(iii) is titled Variations permitted for certain charges and lists certain charges including property insurance premiums, [a]mounts placed into an escrow, impound, reserve, or similar account, and [c]harges paid for third-party services not required by the creditor in the category of charges not subject to tolerance. ^[3] Property taxes, homeowner's association dues, condominium fees, and cooperative fees are all [c]harges paid for third-party services not required by the creditor.

It may not be the ideal solution and the logic may not be perfect, but it is nice to have one TRID controversy put to rest with real guidance credit unions and examiners can point to. NAFCU members still struggling with TRID can always email the NAFCU Regulatory Compliance Team at compliance@nafcu.org.