A mortgage loan customer chose an unaffiliated title company from our service provider list. The title company provided a quote for its title services as well as its fee for conducting the loan closing, and we disclosed both charges on our Loan Estimate. But we recently learned of two changes: the bank will be conducting the loan closing in-house, eliminating the closing fee, but the title company underestimated its quote for the title services due to a clerical error. Can we charge the borrower the correct, higher fee? And when calculating our 10% good faith tolerance levels, can we account for the closing fee that has been dropped?

Yes, you may charge the borrower the correct amount for the title insurance policy — even if it is higher than what you disclosed in your LE — provided that the increase does not cause the total closing costs to exceed the 10% good faith tolerance level for required services that the borrower shopped for.

When, as here, you require a service and the borrower selects an unaffiliated service provider from your provider list, Regulation Z permits the fee to increase from the amount disclosed in the LE. If there is a “change in circumstances,” the fee can increase by any amount. If there is no change in circumstances, then the total of these fees cannot increase by more than 10%.

A “change in circumstance” is defined narrowly in Regulation Z — it includes an extraordinary event beyond your control, changed or inaccurate information specific to the consumer or transaction that you relied on (such as a change in the consumer’s income or employment status), or the discovery of new information specific to the consumer or transaction (such as new information regarding a property dispute). We do not believe that a scrivener’s error meets any of the criteria for a changed circumstance. Consequently, the total costs for third-party services that the borrower shopped for may not increase by more than 10%.

The Regulation Z Official Interpretations clarify that the fees used to calculate the 10% tolerance level “must reflect charges for services that are actually performed.” Consequently, you should not include any fee disclosed in the LE for a service that will not be performed.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.19(e)(3)(ii) (“An estimate of a charge for a third-party service or a recording fee is in good faith if: (A) The aggregate amount of charges for third-party services and recording fees paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed under paragraph (e)(1)(i) of this section by more than 10 percent; (B) The charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and (C) The creditor permits the consumer to shop for the third-party service, consistent with paragraph (e)(1)(vi) of this section.”)
Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 19(e)(3)(ii), Comment 2 (“Pursuant to § 1026.19(e)(3)(ii), whether an individual estimated charge subject to § 1026.19(e)(3)(ii) is in good faith depends on whether the sum of all charges subject to § 1026.19(e)(3)(ii) increases by more than 10 percent, even if a particular charge does not increase by more than 10 percent. . . .”)
Regulation Z, 12 CFR 1026.19(e)(3)(iv)(A)(2) (“Changed circumstances cause the estimated charges to increase or, in the case of estimated charges identified in paragraph (e)(3)(ii) of this section, cause the aggregate amount of such charges to increase by more than 10 percent. 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)(3)(iv)(A), Comment 2 (“. . . A changed circumstance may also be an unexpected event specific to the consumer or the transaction. For example, if the creditor provided an estimate of title insurance on the disclosures required under § 1026.19(e)(1)(i), but the title insurer goes out of business during underwriting, then this unexpected event specific to the transaction is a changed circumstance. A changed circumstance may also be information specific to the consumer or transaction that the creditor relied upon when providing the disclosures required under § 1026.19(e)(1)(i) and that was inaccurate or changed after the disclosures were provided. 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. Or, assume two co-applicants applied for a mortgage loan. One applicant’s income was $30,000, while the other applicant’s income was $50,000. If the creditor relied on the combined income of $80,000 when providing the disclosures required under § 1026.19(e)(1)(i), but the applicant earning $30,000 becomes unemployed during underwriting, thereby reducing the combined income to $50,000, then this change in information relied upon is a changed circumstance. A changed circumstance may also be the discovery of new information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under § 1026.19(e)(1)(i). For example, if the creditor relied upon the value of the property in providing the disclosures required under § 1026.19(e)(1)(i), but during underwriting a neighbor of the seller, upon learning of the impending sale of the property, files a claim contesting the boundary of the property to be sold, then this new information specific to the transaction is a changed circumstance.”)
Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 19(e)(3)(ii), Comment 5 (“In calculating the aggregate amount of estimated charges for purposes of conducting the good faith analysis pursuant to § 1026.19(e)(3)(ii), the aggregate amount of estimated charges must reflect charges for services that are actually performed. For example, assume that the creditor included a $100 estimated fee for a pest inspection in the disclosures provided pursuant to § 1026.19(e)(1)(i), and the fee is included in the category of charges subject to § 1026.19(e)(3)(ii), but a pest inspection was not obtained in connection with the transaction, then for purposes of the good faith analysis required under § 1026.19(e)(3)(ii), the sum of all charges subject to § 1026.19(e)(3)(ii) paid by or imposed on the consumer is compared to the sum of all such charges disclosed pursuant to § 1026.19(e), minus the $100 estimated pest inspection fee.”)