Compliance Blog

Being stuck at home during the coronavirus pandemic, many people have turned to videogames for entertainment. One of the games that is popular in my household is Animal Crossing: New Horizons for the Nintendo Switch. If you’re not familiar with the game, here is the basic premise: The player’s character (a cartoon human) moves to a deserted island with a couple of anthropomorphic animals. Over time, the island is spruced up by plucking weeds, building homes, adding shops, and attracting new animal-residents.

What does this have to do with credit unions? The player is given a home loan when he or she first goes to the island, which needs to be paid off in a currency called “bells.” The home loan is provided by a racoon named Tom Nook, who allows the player to repay their home loan with zero interest and on a pay-as-you-wish plan. You’d be hard-pressed to find a financial institution in the real world that offers those terms for a mortgage. There are also no disclosures in Animal Crossing – Tom Nook provides no loan estimate or closing disclosure, or any other documentation.

Of course, in the real world credit unions and other financial institutions have to deal with the TILA-RESPA Integrated Disclosure (TRID). The NAFCU compliance team frequently gets questions regarding TRID, so let’s examine one aspect of it – the provisions relating to the loan estimate and whether or not a member is afforded the ability to “shop” for a settlement service.

Section 1026.19(e) of Regulation Z provides the requirements for the loan estimate, which must be delivered or mailed to the member no later than 3 business days after receiving the mortgage application. Section 1026.19(e)(1)(vi)(B) requires the credit union to disclose the services for which the member is permitted to shop in the loan estimate.

Determining whether the member is permitted to shop for the settlement service will determine the portion of the loan estimate form in which the estimated charges should appear. As illustrated in the CFPB’s Loan Estimate Explainer (which includes a sample loan estimate form), the services for which the member is not permitted to shop should be included in section B, whereas the services for which the member is permitted to shop should be included in section C of the loan estimate.

The staff commentary states that whether the credit union permits the member to shop “…is determined based on all the relevant facts and circumstances.” The flexibility the credit union affords to the member in selecting the service provider can be an important factor in determining if the member has been permitted to shop. Section 1026.19(e)(1)(vi)(A) clarifies that a credit union permits a member to shop for a settlement service if the credit union “permits the [member] to select the provider of that service, subject to reasonable requirements” (emphasis added).

Requiring a member to use one particular service provider that the credit union selects, without allowing for any other options, would be a situation in which the member is not permitted to shop. But what if the credit union provides a list of potential service providers? Section 1026.19(e)(1)(vi)(C) states that when the credit union permits the member to shop, the credit union is actually required to provide the member with a list of “at least one available provider for each settlement service...” and notes that the list should state that the member “may choose a different provider for that service.” Comment 3 to section 1026.19(e)(1)(vi) notes that settlement service providers on the list must correspond to the list of services for which the member may shop in section C of the loan estimate form. Additionally, comment 4 states that the list must include “sufficient information to allow the [member] to contact the provider” and that providing a list of service providers that are no longer in business, or which do not provide services where the member is located would be insufficient to comply with section 1026.19(e)(1)(vi)(C).

What if the credit union provides a list of possible service providers, but the credit union requires the member to select a service provider from the list rather than allowing the member to choose from outside the list? Comment 3 of the staff commentary to section 1026.19(e)(1)(vi) clarifies that a member is not permitted to shop if the credit union “requires the [member] to choose a provider from a list provided by the [credit union].”

In other words, the staff commentary indicates that a credit union that limits the member’s options to a specific pool of service providers would not be allowing the member to shop for those services. On the other hand, allowing the member to choose whichever service provider they prefer, while merely offering a few possible options in the form of a list, could be viewed as allowing the member to shop.  

Part 2 of this blog will explore how the tolerances in section 1026.19 will apply depending on the outcome of this determination (i.e. whether the member is permitted to shop). In other words, the determination described above, as well as the service provider that the member ultimately chooses, will affect how much the estimated fees are allowed to increase by the time the closing disclosure is provided.