True or False: Lender credits should never decrease.
Well, the TRID best practice over the years has said that once a lender credit is listed on the LE, it should never decrease. This philosophy seems to align with that of the CFPB who views a decrease of a lender credit to be the equivalent of an increase of a fee.
In fact, the preamble to the final TRID rule states that “lenders are not permitted to reduce the lender credits they provided to the borrower under current Regulation X.”
So, this means that a lender credit should never be reduced, right?
Well, not exactly.
The Rules for Reducing a Lender Credit
While both Regulation Z and its commentary don’t address reducing a lender credit, the preamble in both the TRID final rule and the 2017 TRID amendments make it clear that a changed circumstance or a borrower-requested change can decrease specific lender credits. Basically, if a credit is going to be provided by a lender that relates to a specific charge (specific lender credit) and the actual charge decreases due to a request by the borrower or a qualified changed circumstance, then the CFPB states that the amount of the (specific) lender credit related to changed circumstance could be decreased.
For reference, here is the applicable section from the preamble to the 2017 TRID amendments:
“The Bureau also declines to make commenter-requested changes to comments 19(e)(3)(i)-5 and -6 to state that where an actual cost decreases from the estimated cost provided to the consumer, a specific lender credit attached to that cost should be permitted to decrease with it. In response to such request and other commenter requests for clarity on the tolerance implications of lender credits on the Loan Estimate, § 1026.19(e)(3)(iv) already provides when a creditor may use a revised estimate for purposes of the § 1026.19(e)(3) good faith determination. The section-by-section analysis of § 1026.19(e)(3)(i) in the TILA-RESPA Final Rule stated that, with respect to whether a changed circumstance or borrower-requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower-requested change can decrease such credits, provided that all of the requirements of § 1026.19(e)(3)(iv) are satisfied.”
And here is the applicable section from the preamble to the original TRID final rule:
“With respect to whether a changed circumstance or borrower-requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower-requested change can decrease such credits, provided that all of the requirements of § 1026.19(e)(3)(iv), discussed below, are satisfied.”
Logistics in Reducing a Lender Credit
While the preamble seems to make it clear that the CFPB believes that a changed circumstance or borrower-requested change can decrease specific lender credits, it may not be practical to do so for a few reasons. First, it is difficult, logistically, to train lending staff when they can and can’t reduce a lender credit. As a reduction in a lender credit that wasn’t permitted to be reduced can result in reimbursements, fines, and even civil liability, many financial institutions -as a management decision - choose to tell their staff that a lender credit should never decrease.
In addition to this, the logistics of identifying a specific lender credit can be challenging as there is no such thing as a specific lender credit on the Loan Estimate. This means that it would be difficult to prove to an auditor or examiner that a lender credit disclosed on a Loan Estimate should have been reduced. For example, auditors and examiners may criticise financial institutions when there is not clear evidence in the file that the original lender credit on the LE was intended for a specific cost, such as an appraisal. Unless a financial has a clear promotion to offer “a free appraisal,” and then the lender credit is only reduced based on a changed circumstance or borrower requested change that affects the appraisal, it could be difficult to prove that the reduction of the lender credit was appropriate.
The bottom line is that, while the preamble seems to make it clear that the CFPB believes that a changed circumstance or borrower requested change can decrease specific lender credits, financial institutions should proceed with caution due to both 1) the logistics involved in justifying the reduction of the credit and 2) the challenges associated with allowing lenders the ability to reduce lender credits on a case-by-case basis.