When Is a 10 Percent TRID Tolerance Not a 10 Percent Tolerance?

(Michael Cremata is corporate counsel with ClosingCorp, San Diego. The company’s website is http://www.closing.com/.)

There’s a saying in sports: “Go big or go home,” and it also applies to fees and changes in circumstances with the TILA-RESPA Integrated Disclosure rule.

That’s because TRID treats large changes in circumstances differently than small ones and this can create problems for lenders who think they have 10 percent tolerance for certain kinds of fees when in fact they don’t.

Wait a minute! If there’s one thing that’s always been clear about TRID it’s that there’s a 10 percent tolerance for shoppable fees, like title. Right? Well, the correct answer is: maybe.

Let’s look at a couple of scenarios. In the first case, the lender issues a loan estimate (LE) for a total of $1,000 in shoppable fees, like title, from non-affiliated providers. Those fees should have a 10 percent tolerance, which is calculated using $1,000 as the baseline for determining whether a tolerance violation exists at closing. As long as fees don’t increase above $1,100 (baseline + 10 percent), there will be no violation.

But now a changed circumstance arises, causing title fees to increase by $200, so the original LE is out of tolerance. TRID entitles the lender to issue a new LE, with a new “baseline” of $1,200. Fees can now increase as high as $1,320 before there is a violation at closing.

Everyone’s familiar with this scenario. This is the way changed circumstances are supposed to work. The lender isn’t “punished” for unforeseen changes. They still get their 10 percent cushion no matter what. Right? Well, not always.

Consider scenario #2: Just like in the first scenario, the lender issues an LE with total 10 percent tolerance fees of $1,000; baseline is $1,000; fees can increase as high as $1,100 before there’s a violation. But this time, the changed circumstance only causes title to increase by $100. Total 10 percent tolerance fees are now $1,100. According to TRID, the original LE is still within prescribed tolerances so the lender doesn’t have to issue a revised LE.

The lender “can” issue a revised LE if it wants to, but it will not get the benefit of an increased baseline: tolerance calculations will still be based on the original estimate of $1,000 (!).

What this means is that those 10 percent tolerance fees, which the lender estimated at $1,100 after the changed circumstance, are now effectively being held to 0 percent tolerance. Any increase, in any fee, if it’s not a changed circumstance, could cause total 10 percent tolerance fees to exceed $1,100 and result in a tolerance violation.

The lender in scenario #2 is essentially being punished for the size of the changed circumstance-which they, by definition, had no control over.

Ironically, if the changed circumstance had caused title to increase by just one more dollar, the lender would have gotten a new baseline (at $1,101) and a fresh 10 percent cushion of $1,211.

What are the takeaways? First, you don’t really know what tolerance is going to apply to the fees in your 10 percent tolerance bucket. Under some circumstances, it could be 10 percent, 5 percent, even 0 percent. If there’s a changed circumstance between the LE and CD, you better hope it’s a big one. Because if it causes 10 percent tolerance fees to increase by something less than 10 percent, then that 10 percent cushion you thought you had just got a little (or maybe a lot) smaller.

Richard Horn, member of Richard Horn Legal, PLLC and former Consumer Financial Protection Bureau senior counsel and special advisor who led the TRID rule, says the CFPB’s view is that this is the way RESPA should have been interpreted all along. Thus, they’ve never really viewed Comment 19(e)(3)(iv)(A)-1.ii, which interprets the 10 percent tolerance, as a change implemented by TRID, but merely a point of clarification. This may be why it wasn’t highlighted and has largely passed under the radar.

In any case, it certainly is a change from the way the industry interpreted RESPA and calculated tolerances before TRID.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at msorohan@mba.org.)