The below article is the Special Focus section of the November 2018 Compliance Journal. The full issue may be viewed by clicking here.
Complying with TRID 2.0 became mandatory on October 1, 2018. TRID 2.0 represents the first set of major changes to the TILA/RESPA Integrated Disclosure Rule (TRID) since its inception back in 2015. These changes primarily addressed areas of TRID 1.0 which left a lot to be desired – disclosures for construction loans and simultaneous subordinate liens. Lucky for banks, a number of these changes (e.g. the dreaded Cash to Close table) were, in all likelihood, addressed by your vendor. However, certain changes require bank intervention or, at the very least, bank knowledge. One of those changes is the disclosure of inspection/draw/handling fees for the staged disbursement of construction loan proceeds. Under revised TRID rules, how you disclose inspection/draw/handling fees depends upon when those fees are collected from the consumer. Banks should also be aware of how these changes affect tolerance calculations.
In a construction or construction to permanent loan, banks or title companies often assess an Inspection/Draw/Handling fee (or separate, itemized fees) for the staged disbursement of construction loan proceeds. If such fees are collected from the consumer at or before closing, such fees are disclosed on the Loan Estimate and Closing Disclosure as usual – in the Loan Costs table in sections A, B, or C, as appropriate. Under revised TRID rules, however, if these fees are collected from the consumer AFTER closing (either by the bank or third party, such as a title company), the Inspection/Draw/Handling Fee(s) must be disclosed on a separate Addendum, which must accompany the Loan Estimate and Closing Disclosure. The Addendum must be titled “Inspection and Handling Fees Collected After Closing”. Importantly, irrespective of how these fees are collected – before, at, or after closing – a bank must list the fees on the Written List of Providers (a.k.a. Shopping List) if the consumer has the ability to shop for the services, according to informal guidance provided by CFPB.
It appears that CFPB modified the disclosure requirements for Inspection/Draw/Handling Fees collected post-closing in order for such fees to be more accurately reflected in the disclosures on the Loan Estimate and Closing Disclosure. For example, if an Inspection/Draw/Handling Fee is collected from the consumer after closing, certainly that fee should not affect the “Cash to Close” calculation. To this end, CFPB did provide the following guidance for Inspection/Draw/Handling fees collected post-closing and disclosed on an Addendum:
- Such fees are considered “loan costs.” Therefore, such fees should be included in the Total of Payments calculation and the In 5 Years calculation.
- Such fees are finance charges and are included as finance charges anywhere a finance charge is included on the disclosures (e.g. in the APR calculation), except these fees should be excluded from all Cash to Close calculations on the disclosures.
- If such fees are withheld from the proceeds of the credit, the fees are prepaid finance charges and the Amount Financed Calculation should reflect the fee(s). Otherwise – that is, if a post-closing Inspection/Draw/Handling fee is not a prepaid financed charge – the Amount Financed calculation should not reflect these fees.
Finally, it’s important to note the impact on tolerance calculations for Inspection/Draw/Handling fees under revised TRID rules.
- Inspection/Draw/Handling Fees Collected at or before Consummation. First, if these fees are disclosed in the Loan Costs Table because they are collected at or before closing, they are subject to tolerance just like any other fees disclosed in the Loan Costs table. That is, the tolerance standard is zero, 10%, or unlimited. No change under TRID 2.0.
- Inspection/Draw/Handling Fees Disclosed on an Addendum and Collected Post-Closing. If an Inspection/Draw/Handling fee is disclosed on an Addendum (because it’s intended to be collected post-closing) and such fees are actually collected post-closing, the best information reasonably available standard applies. Therefore, no tolerance violation will occur.
- Post-Closing Inspection/Draw/Handling Fees Change Between Addenda. According to informal guidance provided by CFPB, if a post-closing inspection/draw/handling fee amount changes between the time an Addendum is issued with the Loan Estimate (or a revised disclosure) and the Addendum issued with the final CD, a conservative reading of the rule is that the fees disclosed on the Addenda may not be governed by the “best information reasonably available standard”. Rather, the fees will be governed by the tolerance category that would apply to those loan costs absent an Addendum. That is, the fees could be subject to 10%, 0%, or unlimited tolerance depending on whether or not the fee is an origination charge and whether or not shopping is permitted/the customer shopped. Put simply, the tolerance is based on whether the fee would be located in Loan Costs section A, B, or C if there wasn’t an Addendum.
Banks should also note that if there is a change to when an Inspection/Draw/Handling Fee will be collected from the consumer, this will likely be a changed circumstances and tolerance will reset for the Inspection/Draw/Handling fee(s). For example, Bank issued a Loan Estimate and disclosed a Draw fee on an accompanying Addendum because Title Company, who was managing the draws, planned to collect the amount from the consumer post-closing. Two days after the Loan Estimate is issued and weeks before the Closing Disclosure must be issued, Bank decides it will now manage the draws itself and will be collecting the Draw fee from the consumer at closing. According to informal guidance provided by CFPB, this is likely a changed circumstance and, as such, the Bank may reset tolerance for the Draw fee with the issuance of the appropriate disclosure (here, a revised Loan Estimate). The revised disclosure should list the Draw fee in the Loan Costs section, in A, B, or C, as appropriate.
In summary, banks should familiarize themselves with these changes, as applicable to their practices. In addition, it’s important to ensure that your vendor is capable of managing the bank’s construction lending practices for the assessment of Inspection/Draw/Handling fees.
WBA wishes to thank Atty. Lauren C. Capitini, Boardman & Clark, llp for providing this article.
By, Ally Bates