RSK.IQ Question of the Week 11/30/15

TRID and Disclosing Fee of Borrower’s Attorney


The Bank asks whether it is required under the new TRID rules to disclose the cost of the borrower’s attorney in the Loan Estimate. If such is included, how would it best be handled?

Response Summary

If it is customary for consumers in the jurisdiction where the property is located to be represented by an attorney, the Bank should treat the fee of the consumer’s attorney as being in effect a Bank-required charge. If the Bank wishes to have the benefit of the 10 percent cumulative tolerance for charges by the service providers that it requires, it must allow the consumer to shop for his/her attorney. In such case, the estimate of the attorney’s fee would appear in the Loan Estimate in “Services You Can Shop For,” and a written list of service providers would be given to the consumer at the time the Loan Estimate is provided. In choosing an attorney for the list, the Bank would consider factors such as the attorney’s experience in handling residential real estate transactions. If the consumer chooses an attorney on the list, the attorney’s fee would fall within the 10 percent cumulative tolerance for such charges. If the consumer chooses an attorney not on the list, the fee of this attorney would not be subject to a tolerance limitation.

Response Detail

In closed-end mortgage transactions other than reverse mortgages, the Truth-in-Lending Real Estate Settlement and Procedures Act Integrated Disclosure (“TRID”) Rule requires a lender to provide the consumer with a Loan Estimate disclosing the fees and charges associated with a loan, including loan costs. Generally, “loan costs” are those costs paid by the consumer to the bank or third party providers of services the lender requires the consumer to obtain. Other costs include taxes, governmental recording fees, and other fees and charges associated with the real estate closing process. 12 CFR §1026.19(e)(3)(iii).

Lenders are responsible for ensuring that the figures stated in the Loan Estimate are made in good faith and consistent with the best information available. Such charges are considered to have been given in good faith if they do not exceed the prescribed tolerance for such charges. There is a 10 percent cumulative tolerance for charges paid to third parties, zero tolerance for such charges as the loan origination fee or transfer taxes, and charges for which no tolerance restriction applies. 12 CFR §1026.19(e)(3)(ii).

The general rule is that if the charge imposed on the consumer at closing exceeds the amount disclosed in the Loan Estimate by the tolerance factor allowed, it will not be deemed to have been made in good faith, regardless of the basis for the estimate. It will only be considered to have been made in good faith to the extent the lender charges the consumer no more than what was disclosed, together with the tolerance factor. §1026.19(e)(3)(i) & (ii).

For certain costs and terms, however, a lender may charge the consumer more than was disclosed, regardless of tolerance limitations:

  • Prepaid interest
  • Property insurance premiums
  • Amounts placed in escrow, impound, reserve, or similar accounts
  • The charges for services required by the bank, if the consumer is permitted to shop and chooses a service provider not on the bank’s list of approved service providers
  • Charges for services not required by lender

A lender, however, can charge the consumer more than was disclosed on the Loan Estimate, or not disclosed at all, but only if the original estimate was based on the best information reasonably available to it. 12 CFR §1026.19(e)(3)(iii).

In this case, the Bank asks how the charges for a consumer’s attorney should be disclosed. We will assume that the consumer’s attorney is providing personal counsel to the consumer and is not the closing attorney, which would be considered a lender-required charge. Since the Bank would not have required the consumer to have obtained counsel, would this fall under one of the exceptions? If so, would it have to be disclosed only to the extent the Bank was aware at the time of the Loan Estimate that the consumer was going to obtain the services of his/her own legal counsel?

The answers to these questions turn upon the facts of the transaction. As per the official commentary, if the subject property is located in a jurisdiction where a consumer is customarily represented at closing by his/her own attorney, even though it is not a requirement, and the Bank fails to include a fee for the consumer’s attorney, or includes an unreasonably low estimate for such a fee, then the Bank’s failure or underestimation would not comply with the requirements of the TRID Rule.  Official Interpretations, ¶1026.19(e)(3)(iii)-3.

This means that, if the customs of the jurisdiction where the property is located are such that a consumer would probably be represented by counsel, the Bank in making a loan in that jurisdiction will have, in effect, required the consumer to obtain counsel. While this creates an ambiguity with the wording of the regulation, the interpretation of that wording by the commentary is so clear that the prudent practice of the Bank in addressing it should be to treat the fee of the borrower’s attorney as a charge it requires, whenever this conforms to the customary usage of the jurisdiction in which the property is located.

If the charge of the consumer’s attorney in such circumstances is deemed to be a Bank-required charge, how then should it be disclosed? If the Bank wants to enjoy the benefit of the 10 percent tolerance factor, then it must allow the consumer to shop for the services of an attorney. The estimate of the attorney’s fee would appear on the Loan Estimate in “Services You Can Shop For.” The Bank would also provide the consumer with a written list of settlement services. This list is separate from the Loan Estimate but must be provided at the same time; that is, within three business days after the Bank receives the consumer’s application. It must include the following information:

  • Identify at least one available settlement service provider for the service
  • State that the consumer may choose a different provider for the service. 12 CFR §§1026.19(e)(3)(ii) and (e)(1)(vi)(C).

Given the potential liability in offering a service provider, the Bank should be aware of the following when choosing an attorney for the list of settlement services:

  • The length of time the attorney has been licensed
  • The experience of the attorney in handling residential mortgage loan transactions
  • The attorney’s professional reputation
  • The attorney’s fee for such matters

In the event that the consumer chooses the attorney on the list to represent him, the attorney’s fee will be included in the charges subject to the 10 percent cumulative tolerance. If the consumer chooses an attorney who is not on the list, there is no tolerance limitation on the fee charged by this attorney. 12 CFR §§1026.19(e)(3)(iii); Official Interpretations, ¶1026.19(e)(2)(iii)-3.

This entry was posted on Monday, November 30th, 2015 at 2:00 pm.

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