We believe a buydown subsidy should be disclosed as a “Seller Credit” in the “Summaries of Transactions” table on the CD. Also, we recommend conducting due diligence on any builders, sellers, and realtors before partnering with them to ensure that they will not be violating fair lending laws when offering the incentive.
Regulation Z’s Official Interpretations expressly address how an interest rate buydown by a seller or third party should be disclosed, stating that disclosure of the buydown credit depends on whether it is part of the credit contract between the bank and the borrower: “If the buydown is reflected in the credit contract between the consumer and the bank, the finance charge and all other disclosures affected by it must take the buydown into account as an amendment to the contract’s interest rate provision.” However, the amount paid by the seller should not be specifically reflected in the disclosure of the finance charge and other disclosures affected by it, since that amount constitutes seller’s points and is not part of the finance charge. If the buydown is not reflected in the credit contract, “the disclosure of the finance charge and other disclosures affected by it . . . must not reflect the seller buydown in any way.”
In either case, a seller-paid buydown must be disclosed as a credit from the seller in sections L and N of the “Summaries of Transactions” table of the CD. The Official Interpretations do not mention the LE, and we do not believe Regulation Z requires such a buydown to be disclosed on the LE. Additionally, we do not believe the buydown should be disclosed under Section H of the CD, as that section is reserved for “charges in connection with the transaction . . . for services that are required or obtained in the real estate closing by the consumer, the seller, or other party.”
Regarding fair lending risks, Regulation B states that a creditor may be responsible for a third party’s violation of the Equal Credit Opportunity Act (ECOA) if the creditor “knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction.” Additionally, your bank could be liable under the ECOA if third parties offer temporary buydown subsidies to borrowers in a way that results in a disparate impact on protected classes — for example, if the third parties offer the subsidies to only a portion of your customers borrowers in a way that skews toward certain demographics.
Accordingly, the Interagency Fair Lending Examination Procedures state that “[t]he institution’s familiarity with third party actions may be important, for an institution may be in violation if it participates in transactions in which it knew or reasonably ought to have known other parties were discriminating.” Consequently, we recommend conducting due diligence on any builders, sellers, and realtors you are planning to partner with to ensure that they will not be offering the buydown incentive on a prohibited discriminatory basis.
We are not aware of any guidance from the regulators expressing their expectations regarding how financial institutions should implement temporary buydown subsidies.
For resources related to our guidance, please see:
- Regulation Z, Official Interpretations, Paragraph 17(c)(1), Comment 3 (“In certain transactions, a seller or other third party may pay an amount, either to the creditor or to the consumer, in order to reduce the consumer’s payments for all or a portion of the credit term. For example, a consumer and a bank agree to a mortgage with an interest rate of 15% and level payments over 25 years. By a separate agreement, the seller of the property agrees to subsidize the consumer’s payments for the first two years of the mortgage, giving the consumer an effective rate of 12% for that period.”)
- Regulation Z, Official Interpretations, Paragraph 17(c)(1), Comment 3(i) (“If the third-party buydown is reflected in the credit contract between the consumer and the bank, the finance charge and all other disclosures affected by it must take the buydown into account as an amendment to the contract’s interest rate provision. For example, the annual percentage rate must be a composite rate that takes account of both the lower initial rate and the higher subsequent rate, and the disclosures required under §§ 1026.18(g), 1026.18(s), 1026.37(c), and 1026.38(c), as applicable, must reflect the two payment levels, except as otherwise provided in those paragraphs. However, the amount paid by the seller would not be specifically reflected in the disclosure of the finance charge and other disclosures affected by it given by the bank, since that amount constitutes seller’s points and thus is not part of the finance charge. The seller-paid amount is disclosed, however, as a credit from the seller in the summaries of transactions disclosed pursuant to § 1026.38(j) and (k).”)
- Regulation Z, Official Interpretations, Paragraph 17(c)(1), Comment 3(ii) (“If the third-party buydown is not reflected in the credit contract between the consumer and the bank and the consumer is legally bound to the 15% rate from the outset, the disclosure of the finance charge and other disclosures affected by it given by the bank must not reflect the seller buydown in any way. For example, the annual percentage rate and disclosures required under §§ 1026.18(g), 1026.18(s), 1026.37(c), and 1026.38(c), as applicable, would not take into account the reduction in the interest rate and payment level for the first two years resulting from the buydown. The seller-paid amount is, however, disclosed as a credit from the seller in the summaries of transactions disclosed pursuant to § 1026.38(j) and (k).”)
- Regulation Z, 12 CFR 1026.38(j) (“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 the borrower. . . . (v) The total amount of money that the seller will provide at the real estate closing as a lump sum not otherwise itemized to pay for loan costs as determined by paragraph (f) of this section and other costs as determined by paragraph (g) of this section and any other obligations of the seller to be paid directly to the consumer, labeled ‘Seller Credit’.”)
- Regulation Z, 12 CFR 1026.38(k) (“Under the heading ‘Summaries of Transactions’ required by paragraph (j) of this section, a separate table under the subheading ‘Seller’s Transaction,’ that includes the following information and satisfies the following requirements: . . . (2) Itemization of amounts due from seller. . . . (vii) The total amount of money that the seller will provide at the real estate closing as a lump sum not otherwise itemized to pay for loan costs as determined by paragraph (f) of this section and other costs as determined by paragraph (g) of this section and any other obligations of the seller to be paid directly to the consumer, labeled ‘Seller Credit’.”)
- Regulation Z, 12 CFR 1026.38(g)(4) (“Under the subheading ‘Other’ and in the applicable column as described in paragraph (g) of this section, an itemization of each amount for charges in connection with the transaction that are in addition to the charges disclosed under paragraphs (f) and (g)(1) through (3) for services that are required or obtained in the real estate closing by the consumer, the seller, or other party, the name of the person ultimately receiving the payment, and the total of all such itemized amounts that are designated borrower-paid at or before closing.”)
- Regulation B, 12 CFR 1002.2(l) (“Creditor means a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit. The term creditor includes a creditor’s assignee, transferee, or subrogee who so participates. For purposes of §§ 1002.4(a) and (b), the term creditor also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made. A person is not a creditor regarding any violation of the Act or this part committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction. The term does not include a person whose only participation in a credit transaction involves honoring a credit card.”)
- Regulation B, Official Interpretations, Paragraph 2(l), Comment 2 (“For certain purposes, the term creditor includes persons such as real estate brokers, automobile dealers, home builders, and home-improvement contractors who do not participate in credit decisions but who only accept applications and refer applicants to creditors, or select or offer to select creditors to whom credit requests can be made. These persons must comply with § 1002.4(a), the general rule prohibiting discrimination, and with § 1002.4(b), the general rule against discouraging applications.”)
- Regulation B, 12 CFR 1002.4(a) (“A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.”)
- Regulation B, 12 CFR 1002.4(b) (“A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”)
- FFIEC Interagency Fair Lending Procedures, page iv (“When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a ‘disparate impact.’ . . . The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. When an Agency finds that a lender’s policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by ‘business necessity.’ The justification must be manifest and may not be hypothetical or speculative. Factors that may be relevant to the justification could include cost and profitability. Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect.”)
- FFIEC Interagency Fair Lending Examination Procedures, page 4 (“The institution’s familiarity with third party actions may be important, for an institution may be in violation if it participates in transactions in which it knew or reasonably ought to have known other parties were discriminating.”)