When is a revised Loan Estimate required?
As the Loan Estimate (LE) rules have been around for a few years now, there still seems to be some confusion about the good faith requirements in regards to tolerances and cures. In my experience, much of this confusion is a result of financial institutions reissuing too many LEs and not fully understanding the revised Loan Estimate requirements. The reality is that many financial institutions provide far more revised Loan Estimates than are necessary. This “over-disclosing” of the LE creates more work for mortgage processors and creates confusion for customers. Therefore, knowing when a revised Loan Estimate is actually required can help to create efficiency, increase customer satisfaction, and create an all around better loan process.
So, when is a revised loan estimate actually required?
Understanding the Revised Loan Estimate Requirements
To fully understand the revised Loan Estimate requirements, it is important for us to know the background of why many creditors are issuing too many revised Loan Estimates.
The Loan Estimate was part of the “integrated disclosures” that were implemented by TRID, which stands for Truth-in-Lending, RESPA integrated disclosures. Essentially, the Loan Estimate is a consolidation of several pre-TRID disclosures, most notably the Good Faith Estimate and the Truth-in-Lending (TIL) disclosure. The TIL was a document required by Regulation Z and provided a disclosure of the APR as well as other payment related terms such as the amount financed and the total of payments. The TIL was required to be redisclosed any time it became inaccurate which was defined as having a change of more than 0.125% for irregular transactions and 0.25% for regular transactions. This meant that creditors were used to sending a revised TIL every time the APR was outside of the defined tolerances.
With the implementation of TRID, Regulation Z no longer requires a revised TIL (now Loan Estimate) when the rate moves outside of the tolerance thresholds. Though the CFPB has never said this, I believe the reason that a revised TIL/APR is not required upon a tolerance change is because TRID rules require that each applicant get a revised APR three days prior to closing - which is delivered through the initial CD. Basically, the fact that the CD is provided to applicants three days before closing essentially means that all applicants get a revised TIL before they close the loan.
Yet, creditors still seem to provide many more revised Loan Estimates than they need to.
When is a Revised Loan Estimate Required?
A revised Loan Estimate is required in three different situations:
When a floating rate is subsequently locked.
When a financial institution chooses to reset their tolerances due to a changed circumstance.
When a financial institution chooses to provide a courtesy Loan Estimate with updated fees and terms.
As you can see from the options above, there is technically only one reason when a new Loan Estimate MUST be provided to an applicant; when a floating rate is subsequently locked. The other two reasons are optional, but are legitimate reasons for providing a Loan Estimate. Also, it is worth noting, as we explained previously, that a revised Loan Estimate is not required when the APR becomes inaccurate.
When a Floating Rate is Subsequently Locked
The first reason a financial institution may provide a revised Loan Estimate - which is also technically the only reason they MUST provide a Loan Estimate - is when a rate that was previously floating becomes locked. Specifically, the rule states that a revised LE is required when the points or lender credits change because the interest rate was not locked when the initial LE was provided.
The second reason a creditor may provide a revised Loan Estimate is when there is a changed circumstance, which includes changes that affect the settlement charges, changes that affect the consumer’s eligibility, and changes requested by the consumer. [ A Quick Note: By using the phrase "changed circumstance," I am referring to the reasons for revised estiamtes - which is the actual language in Regulation Z - which includes 6 total reasons: 1) Changed circumstances affecting settlement charges, 2) Changed circumstances affecting elegibility, 3) Revisions Requested by the consumer 4) Interest Rate dependent changes (which are mandatory as described in the floating rate section above) and 5) Delayed settlement date on a contruction loan.] In these cases, a creditor is permitted, but not required, to provide a new Loan Estimate. In other words, a creditor can choose whether or not to use the changed circumstance to adjust their applicable fees. If the fees don’t change or the creditor doesn’t care about recouping any lost fees associated with the changed circumstance, a revised Loan Estimate is not required. If, however, a creditor wants to recoup all fees related to the changed circumstance, they are going to need to provide a new Loan Estimate within three business days after learning of the change.
A Courtesy Loan Estimate
While the rules don’t require a revised Loan Estimate for every change in fees or terms, creditors are permitted to provide a courtesy Loan Estimate to their disclosures. As discussed previously, many creditors are inadvertently doing this as they don’t fully understand the revised loan estimate requirements. It is our opinion that revised Loan Estimates often create more challenges than they do in helping the consumer to understand the terms of the loans.
The bottom line is that a revised loan estimate is only required when points or lender credits change because the interest rate was previously floating and then subsequently locked. Other reasons are permitted, but not required.
Rules for the Revised Loan Estimate
The official rule for revised Loan Estimates can be found in 1026.19(e)(3) of Regulation Z as follows:
(iv) Revised estimates. For the purpose of determining good faith under paragraph (e)(3)(i) and (ii) of this section, a creditor may use a revised estimate of a charge instead of the estimate of the charge originally disclosed under paragraph (e)(1)(i) of this section if the revision is due to any of the following reasons:
(A) Changed circumstance affecting settlement charges. Changed circumstances cause the estimated charges to increase or, in the case of estimated charges identified in paragraph (e)(3)(ii) of this section, cause the aggregate amount of such charges to increase by more than 10 percent. For purposes of this paragraph, “changed circumstance” means:
(1) An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;
(2) Information specific to the consumer or transaction that the creditor relied upon when providing the disclosures required under paragraph (e)(1)(i) of this section and that was inaccurate or changed after the disclosures were provided; or
(3) New information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under paragraph (e)(1)(i) of this section.
(B) Changed circumstance affecting eligibility. The consumer is ineligible for an estimated charge previously disclosed because a changed circumstance, as defined under paragraph (e)(3)(iv)(A) of this section, affected the consumer's creditworthiness or the value of the security for the loan.
(C) Revisions requested by the consumer. The consumer requests revisions to the credit terms or the settlement that cause an estimated charge to increase.
(D) Interest rate dependent charges. The points or lender credits change because the interest rate was not locked when the disclosures required under paragraph (e)(1)(i) of this section were provided. No later than three business days after the date the interest rate is locked, the creditor shall provide a revised version of the disclosures required under paragraph (e)(1)(i) of this section to the consumer with the revised interest rate, the points disclosed pursuant to § 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms.
(E) Expiration. The consumer indicates an intent to proceed with the transaction more than ten business days after the disclosures required under paragraph (e)(1)(i) of this section are provided pursuant to paragraph (e)(1)(iii) of this section.
(F) Delayed settlement date on a construction loan. In transactions involving new construction, where the creditor reasonably expects that settlement will occur more than 60 days after the disclosures required under paragraph (e)(1)(i) of this section are provided pursuant to paragraph (e)(1)(iii) of this section, the creditor may provide revised disclosures to the consumer if the original disclosures required under paragraph (e)(1)(i) of this section state clearly and conspicuously that at any time prior to 60 days before consummation, the creditor may issue revised disclosures. If no such statement is provided, the creditor may not issue revised disclosures, except as otherwise provided in paragraph (f) of this section.