Do we have to disclose an owner’s title insurance premium on the Loan Estimate and Closing Disclosure when we know that this will be paid by the seller? We require owner’s title insurance and allow the borrower to shop for it, but typically the seller pays for the premium. If we do not disclose the premium on a Loan Estimate, wouldn’t this create a tolerance issue when including it on the Closing Disclosure?

Disclosing a seller-paid premium for owner’s title insurance on the Loan Estimate is optional, but you must disclose this fee on the Closing Disclosure.

With respect to the Loan Estimate, Regulation Z’s Official Interpretations provide lenders two options for disclosing the seller-paid premium for an owner’s title insurance policy. If the lender knows that the seller has agreed to pay this fee, the lender may disclose the fee on this document together with a corresponding seller credit on the Loan Estimate. Alternatively, the lender may choose to not disclose this fee on the Loan Estimate at all, also reflecting the fact that the seller will pay the fee.

If your bank chooses to disclose the seller-paid premium for owner’s title insurance on the Loan Estimate, the appropriate place to list the fee is under the subheading “Services You Can Shop For,” because your bank requires the service, and because Illinois law requires lenders to offer borrowers the option of shopping for title insurance providers (which you have indicated that you do).

However, with respect to the Closing Disclosure, Regulation Z does require a lender to state the seller-paid premium for owner’s title insurance on this document. Since you require an owner’s title insurance policy, and the borrower must be allowed to shop for it under Illinois law, the appropriate place to disclose the premium would be under the subheading “Services Borrower Did Shop For” in the “Seller-Paid” column.

We spoke with a representative from the CFPB, who verbally confirmed that this is the correct approach for disclosing seller-paid fees, such as the premium for an owner’s title insurance policy. The representative further stated that it would be a “cruel trick” to permit lenders to opt out of disclosing a seller-paid charge on a Loan Estimate and then cite the lender with a tolerance violation for disclosing the charge on the Closing Disclosure. Accordingly, while not expressly stated in Regulation Z or its commentary, the CFPB takes the position that choosing to omit a seller-paid fee on the Loan Estimate will not create tolerance issues with respect to the Closing Disclosure.

For resources related to our guidance, please see:

Official Interpretations, Regulation Z, 12 CR 1026, Paragraph 37(h)(1)(vi), Comment 2 (“Seller credits for specific charges. . . . For example . . . . if the creditor knows at the time of the delivery of the Loan Estimate that the seller has agreed to pay the entire $100 pest inspection fee, the creditor may either disclose the required pest inspection fee as $100 under §1026.37(f) with a $100 seller credit disclosed under §1026.37(h)(1)(vi) or disclose nothing under §1026.37(f), reflecting that the specific seller credit will cover the entire pest inspection fee.”)

Regulation Z, 12 CFR 1026.37(h)(1)(vi), Loan Estimate (“Seller credits. The total amount that the seller will pay for total loan costs as determined by paragraph (f)(4) of this section and total other costs as determined by paragraph (g)(5) of this section, to the extent known, disclosed as a negative number, labeled ‘Seller Credits.’”)

Regulation Z, 12 CFR 1026.37(f)(3), Loan Estimate (“Under the subheading ‘Services You Can Shop For,’ an itemization of each amount and a subtotal of all such amounts the consumer will pay for settlement services for which the consumer can shop in accordance with §1026.19(e)(1)(vi)(A) and that are provided by persons other than the creditor or mortgage broker. (i) For any item that is a component of title insurance or is for conducting the closing, the introductory description “Title —” shall appear at the beginning of the label for that item.”)

Regulation Z, 12 CFR 1026.38(f)(3), Closing Disclosure (“Under the subheading ‘Services Borrower Did Shop For’ and in the applicable column as described in paragraph (f) of this section, an itemization of the services and corresponding costs for each of the settlement services required by the creditor for which the consumer shopped in accordance with §1026.19(e)(1)(vi)(A) and that are provided by persons other than the creditor or mortgage broker, the name of the person ultimately receiving the payment for each such amount, and the total of all such itemized costs that are designated borrower-paid at or before closing. . . .”)