Compliance Blog

NAFCU’s first Virtual Regulatory Compliance School runs from July 28th through August 6th, so for today’s blog we will look at one of the topics covered at school: the TILA-RESPA Integrated Disclosures rule (TRID). Interest rates for mortgage loans have been at historic lows this summer, and so I decided to investigate refinancing my mortgage loan. I received the loan estimate within three business days of submitting the loan application as required by section 1026.19(e)(1)(iii) of Regulation Z. I then received the closing disclosure more than three business days before the closing and consummation of the loan as required by section 1026.19(f)(1)(ii)(A). But something looked amiss. The closing disclosure indicated that I needed to bring an additional $2,000 cash to close the loan. After reviewing both documents, it became evident that the discrepancy was because the lender did not disclose anything on the loan estimate for property taxes but then included $2,000 for property taxes on the closing disclosure. Upon seeing the difference, my first question was whether this was permissible under TRID.

TRID Tolerances

The NAFCU Compliance Blog has previously addressed the issue of tolerances for settlement costs under TRID. Section 1026.19(e)(1)(i) requires credit unions to provide good faith estimates in the loan estimate, and section 1026.19(e)(3) explains what constitutes good faith with respect to estimate closing costs. The general rule under section 1026.19(e)(3)(i) is that a closing cost disclosed in the loan estimate is in good faith if the charge ultimately imposed upon the borrower is not greater than what was disclosed in the loan estimate. The rule permits three exceptions to this general rule:

• The total amount of recording fees and closing costs imposed upon the borrower for third-party settlement services a borrower can shop for can be greater than what was disclosed on the loan estimate up to a 10% threshold;
• The amounts of certain charges identified in section 1026.19(e)(3)(iii) imposed upon the borrower can be greater—without any limitation—than what was disclosed on the loan estimate if the amounts disclosed on the loan estimate were based on the best information reasonably available to the credit union when the loan estimate was provided; or
• TRID permits the credit union to send a revised loan estimate to reset tolerances for the good faith determination (e.g., changed circumstances, changes requested by the borrower, rate lock, etc.). See, 12 CFR § 1026.19(e)(3)(ii)-(iv).

Property Taxes

Under TRID, property taxes fall within the second exception. In other words, the charges actually imposed upon the borrower for property taxes can differ from what was originally disclosed in the loan estimate without any limitation if the original disclosure was based on the best information reasonably available to the credit union when the loan estimate was provided. In my situation, the lender argued that it could charge the $2,000 for the property taxes even though it did not include any amount for property taxes on the loan estimate because the lender did not know the actual amount of taxes due.

The issue is that Regulation Z appears to require the lender to act even though the actual amount of taxes due might not be known with absolute certainty when the loan estimate is provided. According to the commentary to section 1026.19(e)(1), creditors are expected to use estimates if certain information is unknown to the creditor. This places an obligation on the creditor to try to satisfy this standard: "The 'reasonably available' standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information." 12 CFR Part 1026, Supp. I, comment 17(c)(2)(i)-1.

Comment 19(e)(3)(iii)-3 to Regulation Z provides even clearer guidance that the imposition of a $2,000 charge for property taxes would mean that the original disclosure for property taxes on the loan estimate—$0—was not made in good faith:

“For example, if the creditor fails to include a charge for property taxes, or includes an unreasonably low estimate for that charge, on the original estimates provided under §1026.19(e)(1)(i), then the creditor's failure to disclose, or unreasonably low estimation, does not comply with §1026.19(e)(3)(iii) and the charge for property tax would be subject to the good faith determination under §1026.19(e)(3)(i).”

Ultimately, the lender removed the $2,000 charge from the closing disclosure and did not require the charge at closing.