There are rarely perfect scenarios in real estate lending. Sure, occasionally a transaction will go as exactly planned, but there are usually one or two quirks in the process that must be addressed to ensure the loan remains in compliance. One of these quirks I continue to see lenders struggle with is when an appraisal fee is collected before closing, but the actual cost of the appraisal comes in below what the creditor collected.
For example, let’s assume a creditor charged $400 for an appraisal before the appraisal was ordered (but after the applicant’s intent to proceed was received). If the actual cost of the appraisal comes in at $375, the creditor is going to owe the applicant $25, which is the difference of what the applicant already paid and the actual cost of the appraisal. As the creditor cannot keep this fee - it would be considered an “unearned fee” under the Section 8 prohibition of RESPA - the creditor must return this money to the borrower.
So, our question becomes this: How is the overage from a fee collected before closing supposed to be disclosed on the Closing Disclosure?
Lender Credit to Refund Appraisal Fee
At first thought, it might seem logical to “reimburse” the customer by giving them a lender credit. Unfortunately, this would not work. The CFPB has made it clear that they view a lender credit as a payment from a creditor to a consumer to pay for a fee. In other words, a lender credit is considered a payment where an overage needs to be refunded (my word). Therefore, the overpayment of an appraisal charge cannot be disclosed as a lender credit.
Three Options for Refunding an Appraisal Fee on the Closing Disclosure
In April of 2016, the CFPB held a webinar where they provided us with three different options on how to reflect an overage refund on a CD when a consumer pays for a charge that ends up being less than initially planned.
Option 1: Sending a Check Before Consummation
First, a creditor can mail a check to the consumer before consummation in the amount of the difference of what they paid and the actual charge. Once the fee is refunded by check (before consummation), only the amount of the actual charge will be listed on the CD as this is the amount collected and retained for the particular fee. IN our example, a creditor would send a check to the customer in the amount of $25 and then only disclose $375 on the CD.
Option 2: Applying the Overage to Another Service
The second option for refunding an amount already paid by a borrower is to apply the excess amount toward other services paid by the consumer before closing. The idea here is that the funds have already been received and are being held by the creditor, so they can be shown as being applied to a different fee. A good option for doing this is to apply the overage to any charges of the creditor, such as an underwriting or processing fee, since the excess is already in their possession before closing.
Option 3: Disclose the Payment at Closing as a Negative Number
Finally, creditors have the option to disclose the full amount collected for the appraisal and then disclose a negative amount of the overage being given back to the customer at closing. The negative amount would be shown on the same line item for that service. In our example, $400 would be shown as being paid before consummation and negative $25 would be listed as being paid at closing.
Fair Lending Implications
While we are discussing the logistics of giving back an amount that was overpaid before closing, it is worth discussing how fair lending laws might come into play. Specifically, I have seen fair lending questions related to option 2 as described above. The concern with this scenario is that if a bank chooses to (what may seem to be) arbitrarily apply a credit to one of the creditor assessed fees, such as a processing or underwriting fee, that the fees would then be assessed inconsistently to applicants and thus increasing fair lending risk.
In reality, this should only be a concern if the loan file does not clearly document why a creditor’s fee is being reduced. If the reduction is due to an advance payment by the applicant, this isn’t technically a reduction of the fee - it’s just an allocation of how it was paid - and, therefore, would not have fair lending implications. That said, if a loan file does not clearly explain the reduction in fees, auditors and examiners should rightfully question why such fees are not being consistently assessed to applicants.
From the April 2016 CFPB Webinar:
For reference, the following transcription is the applicable example from the April 2016 CFPB webinar.
“Let's assume that the consumer has received the Loan Estimate and has expressed an intention to proceed. The creditor then collects $500 from the consumer for a particular charge, let's say for an appraisal. However, the appraisal winds up only costing $450. Therefore, there is an excess of $50 that the creditor already collected from the consumer and for which there needs to be an allocation of funds to charges that the consumer has paid before consummation.
The question is how the creditor accounts for the excess $50 collected from the consumer before closing and which was not needed for the appraisal service for which it was collected. The creditor has at least two options for how to reconcile those excess funds paid by the consumer before closing. First, the creditor may send the funds back to the consumer before consummation by check. In that event, the creditor would simply disclose $450 as paid by the consumer before closing for the cost of the appraisal.
Second, there are many other costs associated with the residential real estate transaction to which the excess payment from the consumer may be applied. With the second approach, it becomes a question of how to disclose the excess funds on the Closing Disclosure under Section 1026.38(f) and (g). Both provisions state that the charges listed as loan costs and other costs are made in columns stating whether the charge was borrower paid at or before closing. In our example, there are two possible ways to comply with this instruction. The excess $50 may be allocated to other services paid by the consumer before closing, especially to those charges of the creditor, since the $50 is already in the creditor's possession before closing.
Alternatively, the creditor may disclose the full amount collected before closing for the appraisal service and then disclose a negative amount of $50 being given back to the consumer at closing on the same line for that service. But for that specific charge, the creditor would disclose negative $50 as paid by the consumer at closing and $500 as paid by the consumer before closing.”