You may choose whether to disclose a property tax credit on the LE if the credit is for taxes that will be due before the first scheduled loan payment or within sixty days after the closing date. However, if the credit is for taxes that will not be due until more than sixty days after closing, we believe the tax credit should be left off of the LE.
If you have a copy of the purchase agreement and you know that the seller is going to provide a credit for property taxes that are due before the borrower makes the first scheduled payment or within sixty days after the closing, you can disclose the taxes as a prepaid borrower expense in “Section F” of the LE, with the seller credit expressed as a negative number under “Seller Credits” in “Section J.” We do not believe you should list a property tax credit under “Adjustments and Other Credits” in Section J, unless the credit is being paid by a party other than the seller or creditor, since this section is used only for costs “that are paid by persons other than the loan originator, creditor, consumer, or seller.”
Alternatively, you may choose not to disclose the property tax credit on the LE. As an example, the Official Commentary to Regulation Z provides that if a seller has agreed to credit a borrower the entire amount of a $100 pest inspection fee, the fee may be disclosed as a $100 cost to the borrower with the a $100 credit from the seller, or it may not be disclosed at all — “reflecting that the specific seller credit will cover the entire pest inspection fee.” Consequently, we believe a credit for property taxes may be treated in the same manner and expressed as an expense and a credit on the LE or left off the LE entirely.
Additionally, if the borrower will be responsible for a tax bill that is not due until more than sixty days after the closing date, we believe the seller credit (for the portion of the tax period during which the seller owned the property) should be left off the LE, since seller credits are expressed in the LE only in relation to costs that must be disclosed to the borrower on the LE — and property taxes that are not due in advance of the first scheduled loan payment or within sixty days after closing are not required to be disclosed to the borrower on the LE as “prepaid” property taxes.
Further, Regulation Z’s Appendix H includes a model LE and CD for a fixed rate loan that includes a property tax credit on the CD that does not appear in the LE. Sections “F” and “J” of the model LE show no amounts listed for prepaid property taxes or seller credits. However, the corresponding model CD shows a property tax credit from January 1 through the day before the closing date in Sections “L” and “N” of the CD under “Adjustments for Items Unpaid by Seller.”
For resources related to our guidance, please see:
- Regulation Z, 12 CFR 1026.37(g)(2)(iv), Loan Estimate (“Prepaids. Under the subheading ‘Prepaids,’ an itemization of the amounts to be paid by the consumer in advance of the first scheduled payment, and the subtotal of all such amounts, as follows: . . . (iv) On the fourth line, the number of months for which property taxes are to be paid by the consumer at consummation and the total dollar amount to be paid by the consumer at consummation for such taxes, labeled ‘Property Taxes ( __ months).’”)
- Regulation Z, Official Interpretations, Paragraph 37(g)(2), Comment 1 (“Examples of periodic charges that are disclosed pursuant to § 1026.37(g)(2) include: i. Real estate property taxes due within 60 days after consummation of the transaction
- 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(h)(1)(vii), Loan Estimate (“Adjustments and other credits. The amount of all loan costs determined under paragraph (f) of this section and other costs determined under paragraph (g) of this section that are paid by persons other than the loan originator, creditor, consumer, or seller, together with any other amounts not otherwise disclosed under paragraph (f) or (g) of this section that are required to be paid by the consumer at closing in a transaction disclosed under paragraph (h)(1)(iii)(A)(1) of this section or pursuant to a purchase and sale contract, labeled ‘Adjustments and Other Credits’; . . .”)
- Regulation Z, Official Interpretations, Paragraph 37(h)(1)(vi), Comment 2 (“Seller credits for specific charges. To the extent known by the creditor at the time of delivery of the Loan Estimate, specific seller credits, i.e., seller credits for specific items disclosed under § 1026.37(f) and (g), may be either disclosed under § 1026.37(h)(1)(vi) or reflected in the amounts disclosed for those specific items under § 1026.37(f) and (g). For example, if the creditor knows at the time of the delivery of the Loan Estimate that the seller has agreed to pay half of a $100 required pest inspection fee, the creditor may either disclose the required pest inspection fee as $100 under § 1026.37(f) with a $50 seller credit disclosed under § 1026.37(h)(1)(vi) or disclose the required pest inspection fee as $50 under § 1026.37(f), reflecting the specific seller credit in the amount disclosed for the pest inspection fee. 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, Appendix H-24(B) Mortgage Loan Transaction Loan Estimate – Fixed Rate Loan Sample
- Regulation Z, Appendix H-25(B) Mortgage Loan Transaction Closing Disclosure – Fixed Rate Loan Sample
- Regulation Z, 12 CFR 1026.38(j)(2) Closing Disclosure (“Under the heading ‘Summaries of Transactions,’ with a statement to ‘Use this table to see a summary of your transaction,’ two separate tables are disclosed. The first table shall include, under the subheading ‘Borrower's Transaction,’ the following information and shall satisfy the following requirements: . . . (2) Itemization of amounts already paid by or on behalf of borrower. . . . (vii) The description of ‘Adjustments for Items Unpaid by Seller’; (viii) The prorated amount of any unpaid taxes due from the seller to reimburse the consumer at the real estate closing, and the time period corresponding to that amount, labeled ”City/Town Taxes”; (ix) The prorated amount of any unpaid taxes due from the seller to reimburse the consumer at the real estate closing, and the time period corresponding to that amount, labeled “County Taxes”; . . .”)