Though estimate tolerance rules have been around before TRID, “good faith,” tolerances, and refunds/cures seem to still be a challenge for many lenders and creditors. This is concerning as tolerances/cures are one of the higher-risk areas (like rescission) that creditors really need to ensure they are doing appropriately as deficiencies can result in significant fines, penalties, and enforcement actions.
In reviewing the challenges related to calculating “good faith” and providing appropriate refunds/cures, it appears that there still seems to be quite a bit of confusion relating to how a creditor must calculate tolerances in the 10% tolerance bucket.
An Overview of the TRID 10% Tolerance Rules
Under TRID, creditors must disclose - in “good faith” - an estimate of their fees for a credit transaction. This means that a fee is considered to be in “good faith” if the actual fee charged to the customer (on the final Closing Disclosure) does not vary by more than a specified amount from what was disclosed on the original Loan Estimate, or a revised Loan Estimate if applicable. The standard for “good faith” actually varies from fee to fee, but Regulation Z essentially provides three different levels that are used to determine whether or not a fee was disclosed in good faith: the zero tolerance bucket, the 10% tolerance bucket, and the unlimited bucket. In other words, a fee will be considered within tolerance if it does not change by an amount more than the amount allowed in the specific bucket (0%, 10%, or unlimited) based on the type of fee and its associated tolerance bucket.
Resetting 10% Tolerances
One of the biggest challenges in understanding the 10% tolerance rules is realizing that the fees used for the good faith tolerance calculation may not always be the amounts quoted on the original Loan Estimate as the fees may change during the course of the loan. As we have discussed before, there are a number of reasons (e.g. changed circumstance) why a revised fee may be used in place of the fee amount quoted on the original Loan Estimate. A revised fee, however, can only be used in calculating good faith if it is appropriately disclosed on either a revised Loan Estimate or Closing Disclosure.
While one might think that resetting the tolerance for the 10% bucket would seem easy, the rules actually make it a bit complicated. In fact, the rules state that the 10% bucket cannot be reset unless the amount of the change is more than 10% of the aggregate amount of all fees in the 10% bucket. For example, if all of the originally disclosed fees that go in the 10% bucket total $1,000, this means that the 10% bucket can only be reset if the aggregate change is more than $100. The result of this rule is that, even if a creditor receives a valid changed circumstance that increases fees by $90 (when the original amount of fees in the 10% bucket were $1,000), the 10% bucket does not reset and the tolerance amount remains $100 off of the original $1,000. This means that the final fees are still limited to $1,100 and any amount exceeding this must be refunded to the customer. This can be confusing as there was a valid changed circumstance, but the amount of increased fees did not exceed 10%, meaning that the valid changed circumstance did not reset the tolerance amounts used for calculating good faith in the 10% bucket.
If however, a changed circumstance were to increase fees by more than the original $100, such as by $150, then the 10% bucket would be reset so that good faith is calculated off of $1,150, meaning that the final fees can increase by $115 for a total of $1,265 ($1,150 + $115) before a refund (cure) would be required to the borrower.
It is also important to keep in mind that if a disclosed fee/service listed on the Loan Estimate that was originally in the 10% bucket is not purchased, then it has to be removed from the total amount in the 10% bucket for good faith comparison purposes. For example, when a survey fee is disclosed on the Loan Estimate, that fee starts off in the 10% aggregate amount. If that survey is never obtained, meaning a fee was never charged, then the amount of the survey from the original LE is removed from the 10% bucket when calculating the final 10% good faith tolerances. In other words, the rules prohibit lenders from “padding” the 10% bucket by quoting fees/services that may not actually be obtained.
Similarly, if a fee disclosed on the LE starts off in the 10% bucket but ultimately moves to the unlimited category – such as when an applicant chooses their own service provider – the amount of the associated fee is not included in the aggregate amount of the 10% bucket. Rather, that amount moves to the unlimited bucket.
Revised Loan Estimates for Changed Circumstances Affecting the 10% Bucket
In fully understanding the 10% tolerance rules, it is important to realize that the 10% bucket can be reset aggregately, when multiple fees in the 10% bucket change at different times. For example, if an initial changed circumstance changes a fee by 7% and a second changed circumstance changes a fee by 6%, the combined change of 13% is enough to reset the 10% bucket - if a revised Loan Estimate is appropriately provided to inform the applicant of the revised fees.
The question, of course, is this: when must a revised Loan Estimate (or Estimates) be provided to the customer in order to be able to reset the 10% bucket?
This is actually a question we have received quite a bit as there still seems to be some confusion as to how the 10% bucket can be reset. For example, I recently came across the following question which explains this pretty well:
Question - I was re-reading the commentary for 1026.19(e)(4)(I) and was wondering if our prior understanding of re-issuing LE's due to a valid COC is correct. I thought that if you have a valid COC that doesn't tip the 10% bucket, say it's increases it by 5%, then there's a subsequent valid COC, that tips the baseline by another 6%, in order to have the cumulative tipping effect, we had to have had re-disclosed a revised LE with the first valid COC within 3 business days of receiving such information, and then again at the 2nd COC, and the revised 2nd COC then becomes our baseline. But in re-reading the commentary, it appears so long as we issued a revised LE within 3 business days of 2nd COC, we are fine and can re-set our baseline even if we didn't issue a revised LE for the first valid COC since it didn't tip the bucket.
I love the way this question is asked as many creditors seem to have been under the impression that a revised Loan Estimate was required for each changed circumstance when a fee increased, even if the fee did not increase by more than the aggregate 10% amount. In reality, this is not the case as a single revised Loan Estimate can be used to reset the 10% bucket. Also, to clarify, TRID 2.0 did not change these rules.
This confusion seems to be, in part, because the rules are not as clear as they could be and because some have taken the conservative approach by providing a revised LE for each changed circumstance, which is technically permitted, but not required. To explain, the original version of TRID did (but not clearly) provide two main examples clarifying that a creditor can "reach back" to prior changed circumstances and just issue one revised Loan Estimate, once the aggregate increases exceeded 10%. In other words, TRID has always permitted a creditor to “reach back” to prior changed circumstances where a revised Loan Estimate was not provided because the aggregate changed fee(s) associated with the changed circumstance did not exceed the 10% amount to reset the bucket.
These clarifications are found in Comment 19(e)(4)(i)-1 and in the preamble to the original rule as follows:
"ii. Assume a creditor receives information on Monday that, because of a changed circumstance under § 1026.19(e)(3)(iv)(A), the title fees will increase by an amount totaling six percent of the originally estimated settlement charges subject to § 1026.19(e)(3)(ii). The creditor had received information three weeks before that, because of a changed circumstance under § 1026.19(e)(3)(iv)(A), the pest inspection fees increased by an amount totaling five percent of the originally estimated settlement charges subject to § 1026.19(e)(3)(ii). Thus, on Monday, the creditor has received sufficient information to establish a valid reason for revision and must provide revised disclosures reflecting the 11 percent increase by Thursday to comply with § 1026.19(e)(4)(i)."
Also, the preamble to the original TRID rule states this:
"In other words, if, for example, the creditor receives information on May 1, that a fee included in the ten percent tolerance category will increase by an amount totaling six percent of the originated estimated sum of charges in the ten percent tolerance category, and then on May 8th, the creditor receives information that a changed circumstance will cause a different fee included in the ten percent tolerance category to increase by an amount totaling two percent of the originated estimated sum of charges in the ten percent tolerance category, and then on June 15th the creditor receives information that a changed circumstance will cause a different fee included in the ten percent tolerance category to increase by an amount totaling four percent of the originated estimated sum of charges in the ten percent tolerance category, to comply with § 1026.19(e)(4)(i), the creditor would have to provide revised disclosures reflecting the 12 percent increase by June 18th, assuming that June 16th, 17th, and 18th are business days for purposes of § 1026.2(a)(6)."
The bottom line is that a creditor can provide a (courtesy) revised LE for each changed circumstance that does not individually increase the fees by more than 10%, but you are not required to. If you eventually have an aggregate increase of more than 10% and want to adjust your fees, then, in order to adjust your fees and not be required to refund/cure the customer, you must provide a revised LE with the 10+% increase (i.e. the aggregate changes) within 3 days after the last changed circumstance that increased the aggregate amount over 10%. If a revised Loan Estimate is not provided with 3 days after the last changed circumstance that increased the aggregate amount over 10%, the creditor has forgone their opportunity to increase the associated fees and cannot do so at a later time.