TRID and Providing Revised Loan Estimate

Issue/Inquiry

The borrower applied to refinance a mortgage with the Bank.  He was not on the deed, but was going to be added since his father passed away and his mother was handing the home over to him. The processor disclosed this as a modification under New York law rather than a regular refinance, meaning that the state transfer tax would not apply, and the good faith estimate of closing costs in the Loan Estimate was made on that basis. Subsequently, the Bank discovered that the transaction could not be a modification since the borrower was not on the original obligation.  Is the Bank responsible for the tax because it was not disclosed on the original Loan Estimate? What leeway is there, if any, with respect to the “time of discovery” when it comes to reissuing a revised Loan Estimate?  

Response Summary

The discovery that the loan cannot be structured as a Consolidation, Extension, and Modification Agreement (“CEMA”) is a changed circumstance that justifies the issuance of a revised Loan Estimate. However, the revised Loan Estimate would have to be delivered or mailed to the consumer within three business days of receiving sufficient information to establish the changed circumstance. If the changed circumstance is discovered after the Closing Disclosure has been provided, then the change can be reflected in the Closing Disclosure without the need to establish a new waiting period, unless the change results in an increased annual percentage rate, the addition of a prepayment penalty, or a change in the loan product.

Response Detail

Under the TILA-RESPA Integrated Disclosure (“TRID”) rules, creditors are normally bound by the amounts in the Loan Estimate that is given within three business days after receiving the application. However, under certain circumstances, a creditor may revise the Loan Estimate and use the amounts disclosed within it to determine good faith and reset tolerances. Such circumstances include the following:

• A changed circumstance causes the estimated charges to increase beyond the applicable tolerance.
• The consumer is ineligible for an estimated charge previously disclosed because a changed circumstance affected the consumer’s creditworthiness or the value of the security for the loan.
• The consumer requests revisions to the credit terms or settlement that cause an estimated charge to increase.
• The points or lender credits change because the interest rate was not locked when the Loan Estimate was provided.
• The consumer indicates an intent to proceed with the transaction more than 10 business days after the Loan Estimate is provided.
• The settlement date on a construction loan is delayed. 12 CFR 1026.19(e)(3)(iv); Official Interpretations, 1026.19(e)(3)(iv) – 1.

For the purpose of settlement costs, the term “changed circumstances” means:

• An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction
• Information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate which was inaccurate or changed after the disclosures were provided
• New information specific to the consumer or transaction that the creditor did not rely on when providing the Loan Estimate. 12 CFR 1026.19(e)(3)(iv)(A).

In this case, the good faith estimate of closing costs in the Loan Estimate assumed that the transaction would be structured as a New York CEMA.  Under the New York Tax Law, a CEMA or “supplemental instrument or mortgage” may be recorded after the original mortgage and will not be subject to the payment of mortgage recording taxes, as follows:

If subsequent to the recording of a mortgage on which all taxes, if any, accrued under this article have been paid, a supplemental instrument or mortgage is recorded for the purpose of correcting or perfecting any recorded mortgage, or pursuant to some provision or covenant therein, or an additional mortgage is recorded imposing the lien thereof upon property not originally covered by or not described in such recorded primary mortgage for the purpose of securing the principal indebtedness which is or under any contingency may be secured by such recorded primary mortgage, such additional instrument or mortgage shall not be subject to taxation under this article, except as otherwise provided in paragraph (b) of this subdivision, unless it creates or secures a new or further indebtedness or obligation other than the principal indebtedness or obligation secured by or which under any contingency may be secured by the recorded primary mortgage, in which case, a tax is imposed as provided by section two hundred and fifty-three of this article on such new or further indebtedness or obligation. NY Consolidated laws, Tax Law, 255.1.a.i.

However, the Bank subsequently learned that the loan could not be structured as a CEMA, as the borrower was not on the original obligation, and the mortgage recording taxes would be applicable. This is considered a changed circumstance as information relied upon specific to the transaction was inaccurate. Since transfer taxes cannot change from the original estimate, the addition of such as a New York mortgage transfer tax would cause the estimate of closing costs to exceed the applicable tolerance. 12 CFR 1026.19(e)(3)(i).

Although the official commentary does not deal with this kind of circumstance, it provides an example of an appraisal fee disclosed in the Loan Estimate that is based upon the assumption that the property is a farm. If the creditor subsequently discovers that the property is a one-to-four family residence and the fee for the appraisal will be greater, then the Bank is permitted to issue a revised Loan Estimate reflecting the higher appraisal fee, and the appraisal fee charged at closing will be compared to the one in the revised Loan Estimate for determining good faith. Official Interpretations, 1026.19(e)(3)(iv)(A) – 1.

In RSK’s opinion, the Bank’s discovery that the loan cannot be structured as a New York CEMA is analogous to discovering that the nature of a property is different than what was assumed when issuing the Loan Estimate, and, as such, the Bank should be permitted to issue a revised Loan Estimate.

If a creditor uses a revised Loan Estimate, it must be delivered or placed in the mail to the consumer no later than three business days after receiving sufficient information to establish that a reason for issuing a revised Loan Estimate has occurred. 12 CFR 1026.19(e)(4)(i); Official Interpretations, 1026.19(e)(4)(i) – 1.

The official commentary provides an example of a creditor receiving information on a Monday that increases the title costs beyond the applicable tolerance. The creditor would be required to issue a revised Loan Estimate by Thursday in order to comply with the timing requirements of the TRID rules. Official Interpretations, 1026.19(e)(4)(i) – 1.ii.

In this case, when the Bank received information sufficient to indicate that the loan could not be structured as a CEMA, the revised Loan Estimate reflecting the mortgage transfer tax should have been delivered or placed in the mail to the consumer no more than three business days later.

The latest that a revised Loan Estimate may be received by a consumer is four business days before consummation.  If a creditor relies on the mailing rule, under which a consumer is deemed to receive a Loan Estimate three business days after delivery by any method other than personal delivery, then the creditor would need to send the revised Loan Estimate at least seven business days before consummation. 12 CFR §1026.19(e)(4); Official Interpretations, 1026.19(e)(4)(i) – 2.

The creditor cannot issue a revised Loan Estimate after the Closing Disclosure has been provided to the consumer, which must occur at least three business days prior to consummation. If the changed circumstance is discovered during that period before consummation, then the changes can be made in the Closing Disclosure provided to the consumer during that period or at consummation without the need to establish a new waiting period, provided that the change does not result in any of the following:

• Increased annual percentage rate
• Addition of a prepayment penalty
• Change in loan product. 12 CFR 1026.19(e)(4)(ii);(f)(2)(ii).

It is important to note that the Loan Estimate is supposed to include only costs that the borrower is expected to pay. If it is known at the time when the changed circumstance is discovered that the party transferring the title will pay the mortgage transfer cost rather than the borrower, then a revised Loan Estimate will not need to be issued, since the closing costs paid by the borrower will not have increased. However, such cost will be included in the Closing Disclosure, in which all costs related to the real estate transaction are to be included, whether paid by the borrower, the seller, the creditor, or another party. Since the good faith comparisons required under the TRID rules (i.e., sections 1026.19[e][3][i] and 19[e][3][ii]) are comparisons between the estimated closing costs and the actual closing costs paid by or imposed on the consumer/borrower, such do not consider the cost paid by the party transferring the title.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, February 10th, 2020 at 6:00 am.