On a consumer construction loan that closed nearly a year ago, we disclosed fees for six inspections related to an estimated six draws. These six fees were disclosed on the closing disclosure as “services the borrower did not shop for” and were collected at the loan closing. The borrower now has taken more than the estimated six draws, incurring additional, undisclosed inspection fees. Under Regulation Z, can we collect those fees?

In our view, the new fees do not create a tolerance violation under Regulation Z, and you may charge the borrower for the fees, provided that such charges do not violate your loan agreement.

In general, construction inspection fees are loan costs subject to the good faith tolerances for the category in which they fall. For a construction loan, a lender may disclose the inspection fee amounts based on the “best information reasonably available” — such as the amounts the creditor previously charged in similar construction transactions or the amount of estimated inspection fees used to settle the commitment amount. However, the “supplementary information” to the 2017 Regulation Z final rule, the Official Interpretations to Regulation Z, and the CFPB’s Small Entity Compliance Guide, all indicate that if the inspection fees become inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy does not create a tolerance violation.

In this case, it sounds as if you disclosed the projected fees based on the best information available, and events after consummation — the borrower taking unexpected draws — made the fee disclosure inaccurate. Consequently, we think these new fees do not create a tolerance violation under Regulation Z, and we believe that you may charge the borrower for the fees, unless prohibited by your loan agreement.

For resources related to our guidance, please see:

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 38(f), Comment 2 (“Construction loan inspection and handling fees are loan costs associated with the transaction for purposes of § 1026.38(f). For information on how to disclose inspection and handling fees for the staged disbursement of construction loan proceeds if the amount or number of such fees or when they will be collected is not known at or before consummation, see comments 37(f)-3, 37(f)(6)-3, and app. D-7.vii. See § 1026.17(e) and its commentary concerning the effect of subsequent events that cause inaccuracies in disclosures.”)

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 37(f), Comment 3 (“Inspection and handling fees for the staged disbursement of construction loan proceeds, including draw fees, are loan costs associated with the transaction for purposes of § 1026.37(f). If inspection and handling fees are collected at or before consummation, the total of such fees is disclosed in the loan costs table. . . If the number of inspections and disbursements is not known at the time the disclosures are provided, the creditor discloses the fees that will be collected based on the best information reasonably available to the creditor at the time the disclosure is provided. See comment 19(e)(1)(i)-1. See § 1026.17(e) and its commentary for an explanation of the effect of subsequent events that cause inaccuracies in disclosures.”)

Regulation Z, 12 CFR 1026.17(e) (“If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this part, although new disclosures may be required under paragraph (f) of this section, § 1026.19, § 1026.20, or § 1026.48(c)(4).”)

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 17(e), Comment 1 (“Subject to § 1026.19(e) and (f), inaccuracies in disclosures are not violations if attributable to events occurring after the disclosures are made. For example, when the consumer fails to fulfill a prior commitment to keep the collateral insured and the creditor then provides the coverage and charges the consumer for it, such a change does not make the original disclosures inaccurate. The creditor may, however, be required to make new disclosures under § 1026.17(f) or § 1026.19 if the events occurred between disclosure and consummation, in some cases after consummation under § 1026.19(f), or under § 1026.20 if the events occurred after consummation. For rules regarding permissible changes to the information required to be disclosed by § 1026.19(e) and (f), see § 1026.19(e)(3) and (f)(2) and their commentary.”)

CFPB Small Entity Compliance Guide (“Construction inspection and handling fees are Loan Costs and are subject to the good faith tolerances for the category in which they fall, regardless of whether they are collected at or before consummation or after consummation. If the fees are collected after consummation, and become inaccurate due to an event that occurs after the disclosures are provided, the inaccuracy is not a tolerance violation. (§ 1026.17(e))”)

Regulation Z, 2017 Final Rule Unofficial Comments, 82 Fed. Reg. 37656, 37697 (August 11, 2017) (“Therefore, if the inspection and handling fees are in a category of fees that is subject to tolerances and these fees change between the Loan Estimate and the Closing Disclosure without the disclosure of revised estimates that can reset tolerances, the applicable tolerance violation could be present. However, if the fees change after consummation because of subsequent events, as described in § 1026.17(e), there would not be a tolerance violation.”)