IBA Compliance Connection

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We issued a Loan Estimate for a mortgage loan secured by a mobile home. We did not disclose any property taxes due at closing, but we just learned today that for mobile homes, the borrower will have to pay property taxes at the closing for the remainder of the year. Do we have to reimburse the borrower for that charge, since we did not disclose it? Also, the estimated title insurance costs were inaccurate – the owner’s title policy cost decreased by $127, but the lender’s policy increased by $130. Do we have to reimburse for $130, or can we offset that amount by the decreased cost of the owner’s policy? We do not permit borrowers to shop for the lender’s title insurance provider.

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We believe that you should reimburse the customer for the increases in both cases, since there have not been any changes that would qualify as a “changed circumstance” permitting you to issue a revised Loan Estimate.

Regulation Z does permit lenders to revise the charges disclosed in a Loan Estimate, but only if there is a valid “changed circumstance.” A valid changed circumstance could include the correction of inaccurate information or the discovery of new information, such as a correction of the borrower’s reported income or the discovery of an unreleased lien on the property. In our view, the discovery of a mistake in the disclosure of property taxes in the Loan Estimate would not constitute a valid changed circumstance.

Regulation Z requires you to make a good faith estimate of all loan charges. Generally, the estimated charges cannot increase, with some exceptions (including an exception for property taxes). Even if an exception applies, however, you cannot charge more than the estimated charge if the estimate is not “consistent with the best information reasonably available to the creditor at the time it is disclosed . . . .” You also are required to complete due diligence when estimating such charges. Here, it could be argued that your bank did not adequately exercise due diligence by not using the best information reasonably available to it when estimating the property taxes, as it appears that your bank did not use publicly available sources to determine when the mobile home’s property taxes would be due.

Also, there is no exception from the good faith estimate requirement for an increase in the cost of the lender’s title insurance when the borrower is not permitted to select the title insurer. Likewise, there is no provision in Regulation Z that would appear to permit a lender to offset a refund for a disclosure violation because the amount of a separate charge had decreased.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.19(e)(iv)(A) (“For purposes of this paragraph, ‘changed circumstance’ means: (1) An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; (2) Information specific to the consumer or transaction that the creditor relied upon when providing the disclosures required under paragraph (e)(1)(i) of this section and that was inaccurate or changed after the disclosures were provided; or (3) New information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under paragraph (e)(1)(i) of this section. . . .”)

  • Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 19(e)(iv)(A), Comment 2 (“For example, if the creditor relied on the consumer’s income when providing the disclosures required under § 1026.19(e)(1)(i), and the consumer represented to the creditor that the consumer had an annual income of $90,000, but underwriting determines that the consumer’s annual income is only $80,000, then this inaccuracy in information relied upon is a changed circumstance.”)

  • Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 19(e)(iv)(A), Comment 1(ii) (“An unreleased lien is discovered and the title company must perform additional work to release the lien. . . . A changed circumstance has occurred (i.e., new information) . . . .”)

  • Final Rule, Integrated Mortgage Disclosures, 78 Fed. Reg. 80225, 80229 (December 31, 2013) (as corrected on February 2, 2016, 81 Fed. Reg. 7032) (“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 not subject to tolerances whether or not they are placed into an escrow, impound, reserve, or similar account.”)

  • Regulation Z, 12 CFR 1026.19(e)(3) (“An estimated closing cost disclosed pursuant to paragraph (e) of this section is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed under paragraph (e)(1)(i) of this section, except as otherwise provided in paragraphs (e)(3)(ii) through (iv) of this section.”)

  • Regulation Z, 12 CFR 1026.19(e)(3)(iii) (“An estimate of the following charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount paid by the consumer exceeds the amount disclosed . . . .”)

  • Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 19(e)(3)(iii), Comment 1 (“ . . . This means that the estimate disclosed under § 1026.19(e)(1)(i) was obtained by the creditor through due diligence, acting in good faith. . . .”)

  • Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 19(e)(3)(iii), Comment 1 (“ . . . Differences between the amounts of such charges disclosed under § 1026.19(e)(1)(i) and the amounts of such charges paid by or imposed on the consumer do not constitute a lack of good faith, so long as the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. This means that the estimate disclosed under § 1026.19(e)(1)(i) was obtained by the creditor through due diligence, acting in good faith. See comments 17(c)(2)(i)-1 and 19(e)(1)(i)-1. For example, if the creditor requires homeowner’s insurance but fails to include a homeowner’s insurance premium on the estimates provided pursuant to § 1026.19(e)(1)(i), then the creditor’s failure to disclose does not comply with § 1026.19(e)(3)(iii). . . .”)

  • CFPB Small Entity Compliance Guide, printed page 47 (October 2016) (“However, creditors may only charge consumers more than the amount disclosed when the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. (§ 1026.19(e)(3)(iii)).”)

  • Official Interpretations, Regulation Z, Paragraph 19(e)(3)(i), Comment 1(iv) (Charges for which no variations are permitted include “(iv) Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider for a settlement service.”)