One of the most important banking regulation topics for a lender (or processor) to understand in regards to mortgage loans relates to when a revised Loan Estimate (LE) is required. As TRID rules have been around for several years now, you would think that most lenders and processors would have this figured out - which they do for the most part. In reality, the problem I keep seeing is not that a creditor forgets to provide an LE, but rather, that many creditors are wasting their time (and causing confusion) by providing too many Loan Estimates.
When a creditor provides a Loan Estimate that is not required, this creates a number of challenges. First, unnecessary revised Loan Estimates can confuse applicants who are already overwhelmed by the disclosures they are receiving. Secondly, unnecessary revised Loan Estimates create additional work and expenses for the creditor as the LEs must be prepared and appropriately delivered.
That said, the biggest problem I tend to see when a financial institution provides unnecessary Loan Estimates is that this practice creates significant confusion regarding the “good faith” rules (i.e. the tolerance calculations). For example, if a Loan Estimate is provided, out of courtesy, the fees on the new LE cannot be used for calculating good faith (tolerances) under Regulation Z. This makes it very difficult for creditors, auditors, and examiners, to know which numbers are supposed to be used for good faith purposes.
Therefore, it is important for every loan officer and loan processor to fully understand what a changed circumstance is under TRID so they know what exact conditions can be used reset the tolerances for determining good faith.
Defining Good Faith
Good faith is the term referred to in Regulation Z which requires creditors to reimburse customer for certain fee increases on the Closing Disclosure (final costs) which are more than what was disclosed on the initial Loan Estimate. In other words, creditors are required by law to quote fees in “good faith.” Otherwise, the law requires them to refund those fees. This is extremely important to understand because financial institutions have some protection if they self identify and reimburse customers for violations of the good faith rules.
Why Understanding the Changed Circumstance Rules are Important
To understand why the changed circumstance rules are important, we must first understand why a revised Loan Estimate may be provided. Under Regulation Z, a revised Loan Estimate may be provided to applicants for one of three reasons:
As a courtesy to the applicant
Due to a requirement of the Regulation
In order to reset a fee for determining “good faith”
First off, while the original TRID rules didn’t specifically state this, TRID 2.0 clarified in a new comment #4 that a creditor is permitted to provide a revised Loan Estimate to consumers out of courtesy:
"4. Revised disclosures for general informational purposes. Section 1026.19(e)(3)(iv) does not prohibit the creditor from issuing revised disclosures for informational purposes, e.g., to keep the consumer apprised of updated information, even if the revised disclosures may not be used for purposes of determining good faith under § 1026.19(e)(3)(i) and (ii). See comment 19(e)(3)(iv)(A)-1.ii for an example in which the creditor issues revised disclosures even though the sum of all costs subject to the 10 percent tolerance category has not increased by more than 10 percent."
Some banks or credit unions provide a courtesy LE only when a consumer requests it, while others do it for just about every single change to the Loan Estimate. As discussed previously, this can be problematic as a courtesy LE does not reset any fees or charges when determining good faith.
Secondly, a revised Loan Estimate may be provided because Regulation Z requires it. In reality, there is technically only one reason why a revised LE must be issued: when an application with an initially floating rate is subsequently locked before a CD is issued. This requirement comes from 1026.19(e)(3)(iv)(D) of Regulation Z which states the following:
“(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.”
Again, this regulatory requirement where a bank must provide a revised Loan Estimate relates to instances when a rate is locked for the first time after an initial LE was already provided, but before a Closing Disclosure was provided. If a Closing Disclosure was provided before an initially floating rate is finally locked, a revised CD is only needed if the information on the CD becomes inaccurate.
The final reason a revised Loan Estimate may be used ito reset a fee for determining “good faith” is often referred to as a changed circumstance.
Defining a Changed Circumstance
The term “changed circumstance” is often referred to as the reason a revised Loan Estimate must be provided, which can reset the fees and tolerance buckets used to calculate any possible reimbursements. Technically speaking, “changed circumstances” isn’t the best term to explain the requirements under Regulation Z.
You see, the section of Regulation Z which permits a creditor to reset a quoted charged for purposes of determining good faith is 1026.19(e)(3)(iv). This section is titled “Revised Estimates” which lists 6 specific “reasons” which could change a quoted fee for purposes of determining good faith. While two of these reasons are technically called “changed circumstances,” four of the reasons are not. That said, I generally don’t have a problem referring to any of the six reasons found in 1026.19(e)(3)(iv) as a “changed circumstance” as it often makes it easier for training purposes.
The six reason under 1026.19(e)(3)(iv) which permit a creditor to use a revised LE (instead of the original LE) when determining good faith include the following:
A changed circumstance affecting settlement charges, including:
An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction. [1024.19(E)(3)(iv)(A)(1)]
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. [1024.19(E)(3)(iv)(A)(2)]
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. [1024.19(E)(3)(iv)(A)(3)]
A changed circumstance affecting eligibility.
Revisions requested by the consumer.
Interest rate dependent charges.
The expiration of date listed on the LE for when the quoted fees will expire.
Delayed settlement date on a construction loan.
To help us further understand what is a changed circumstance under TRID, let’s take a quick look at each of these reasons.
A Changed Circumstance Affecting Settlement Charges
The first reason a financial institution can use a revised estimate for calculating good faith is when there is a changed circumstance which affects settlement charges. This reason is technically referred to in Regulation Z as “a changed circumstance affecting settlement charges” and contains the three subcategories for this reason:
An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction. [1024.19(E)(3)(iv)(A)(1)]
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. [1024.19(E)(3)(iv)(A)(2)]
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. [1024.19(E)(3)(iv)(A)(3)]
The challenge with the reason of a changed circumstance affecting settlement charges is that the 10% bucket for calculating good faith can only be reset if the increased fee causes the bucket of fees to increase by more than 10%. In other words, if a fee increase only causes the total amount in the 10% bucket to increase by an amount that is less than 10%, then the changed circumstance does not actually reset the 10% bucket for good faith purposes. Now, this is quite complex and is really a discussion for another day, but here is a section of the commentary that explains this challenging element of determining good faith:
“However, the additional costs amount to only a five percent increase over the sum of all fees included in the category of fees which may not increase by more than 10 percent. A changed circumstance has occurred (i.e., new information), but the sum of all costs subject to the 10 percent tolerance category has not increased by more than 10 percent.”
That said, let’s take a bit deeper look at each of the subcategories for the first reason of “a changed circumstance affecting settlement charges.”
An Extraordinary Event
The commentary states that a changed circumstance may be an extraordinary event beyond the control of any interested party. As the commentary uses a war or natural disaster as the main examples of an extraordinary event beyond the control of an interested party, a financial institution using this reason should make sure the reason is not common or used on a regular basis. The commentary does, however, also give an example of where a title company goes out of business, requiring a creditor to utilize a different title company.
In reality, this reason should rarely be used. The best example I have seen is where a financial institution had a unique property they needed appraised. In searching out appraisers, there was only one local appraiser qualified to do the appraisal and his fees were fairly reasonable. A day after the Loan Estimate was provided, this appraiser unexpectedly died and the appraisal company then had to refuse the work because they no longer had a qualified appraiser to complete the task. In this case, the only other option was an out-of-town appraiser who was going to charge three times as much. As this was an extraordinary event beyond the control of any interested party, the financial institution was able to reset their tolerances and charge the applicant for the more expensive appraisal.
Changed Information the Creditor Relied On
The commentary explains that a changed circumstance may also be information specific to the consumer or transaction that the creditor relied upon when providing a Loan Estimate and that was inaccurate or changed after the LE was provided. The commentary provides an example where if the creditor relied on the consumer's income and the consumer represented to the creditor that the consumer had an annual income of $90,000, but underwriting determines that the consumer's annual income is only $80,000, then this inaccuracy in information relied upon is a changed circumstance.
The commentary also provides an example where we assume two co-applicants applied for a mortgage loan. One applicant's income was $30,000, while the other applicant's income was $50,000. If the creditor relied on the combined income of $80,000 when providing the Loan Estimate, but the applicant earning $30,000 becomes unemployed during underwriting, thereby reducing the combined income to $50,000, then this change in information relied upon is considered a changed circumstance.
Discovery of New Information Specific to the Consumer or Transaction
According to the commentary on Regulation Z, a changed circumstance may also be the discovery of new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. The commentary provides an example where if a creditor relied upon the value of the property in providing the Loan Estimate, but during underwriting a neighbor of the seller, upon learning of the impending sale of the property, files a claim contesting the boundary of the property to be sold, then this new information specific to the transaction is considered a changed circumstance.
Changed Circumstance Affecting Eligibility
The second reason a creditor can use a revised estimate for calculating good faith is when there is a changed circumstance affecting the consumer's creditworthiness or the value of the security for the loan.
The commentary explains it this way:
If changed circumstances cause a change in the consumer's eligibility for specific loan terms and revised disclosures are provided because the change in eligibility resulted in increased cost for a settlement service beyond the applicable tolerance threshold, the charge paid by or imposed on the consumer for the settlement service for which cost increased due to the change in eligibility is compared to the revised estimated cost for the settlement service to determine if the actual fee has increased above the estimated fee.
Obviously, the language in the commentary makes it seem more complex that it is. The bottom line with this reason is that if something a creditor relied on changed, revised fees related to the change can be used for determining good faith. The key in this is that fees not related to the change cannot be revised.
The commentary does provide a couple of useful examples as follows:
“For example, assume that, prior to providing the [Loan Estimate], the creditor believed that the consumer was eligible for a loan program that did not require an appraisal. The creditor then provides the [Loan Estimate] which [does] not include an estimated charge for an appraisal. During underwriting it is discovered that the consumer was delinquent on mortgage loan payments in the past, making the consumer ineligible for the loan program originally identified on the estimated disclosures, but the consumer remains eligible for a different program that requires an appraisal. If the creditor provides revised disclosures reflecting the new program and including the appraisal fee, then the actual appraisal fee will be compared to the appraisal fee included in the revised disclosures to determine if the actual fee has increased above the estimated fee. However, if the revised disclosures also include increased estimates for title fees, the actual title fees must be compared to the original estimates assuming that the increased title fees do not stem from the change in eligibility or any other change warranting a revised disclosure.”
Revisions Requested by the Consumer
The third reason a creditor can use a revised estimate for calculating good faith is when the customer specifically requests a revision to the credit terms or the settlement that causes a charge to increase.
This rule makes perfect since. If a customer want to change something, like getting more cash back due to a higher than expected appraised value, then increased fees due to this requested change are the responsibility of the consumer (assuming they are appropriately disclosed).
The commentary provides an example where we assume that a consumer decides to grant a power of attorney authorizing a family member to consummate a transaction on the consumer's behalf after the Loan Estimate is provided. If the creditor provides revised disclosures reflecting the fee to record the power of attorney, then the actual charges will be compared to the revised charges to determine if the fees have increased.
Interest Rate Dependent Charges
The fourth reason a creditor can use a revised estimate for calculating good faith is when the interest rate was not locked but is subsequently locked before a Closing Disclosure is issued. In fact, this is the only “reason” a financial institution is absolutely required to provide a revised Loan Estimate. The other reasons we are discussing are technicaly optional - IF a creditor wants to increase fees. This reason is not optional under the rule as the regulation specifically states the following:
“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.”
The Commentary to TRID 2.0 explains that this rule does not apply if a Closing Disclosure has already been provided to an applicant as a revised Loan Estimate can never be provided after a Closing Disclosure has been provided. In addition, the commentary makes it clear that a revised Closing Disclosure is only required if the closing disclosure is “inaccurate.” If the rate lock causes the Closing Disclosure to become inaccurate, a revised CD is required to be provided no later than three business days before consummation. In other words, you have three days to issue a revised CD when a CD becomes inaccurate, but this could delay your closing because you also have to wait three days before closing after the revised CD is disclosed.
Expiration
The fifth reason a creditor can use a revised estimate for calculating good faith is when a consumer indicates an intent to proceed with a transaction after the expiration of fees date on the Loan Estimate has expired. Regulation Z states that this disclosed date must be at least 10 business days, but can be a longer period if a creditor chooses to disclose a longer period. If that date expires before an intent to proceed is received by the consumer, then fees can be reset.
Delayed Settlement Date on a Construction Loan
The final reason a creditor can use a revised estimate for calculating good faith is when there is a delayed settlement date on a construction loan. The rule states that in transactions involving new construction, where the creditor reasonably expects that settlement will occur more than 60 days after the Loan Estimate is provided, the creditor may provide revised disclosures to the consumer if the original disclosures 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, unless one of the other reasons for revised fees applies.
The Changed Circumstance Rules
The full, 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 10 business days, or more than any additional number of days specified by the creditor before the offer expires, 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 (e)(3)(iv) of this section.
