Article By: Ben Giumarra, Spillane Consulting Associates, Inc.
Seems like a good time to revisit this, as lenders continue to get more comfortable with TRID requirements and start to shred over-conservative policies and cut out instances of “over-compliance.”
I believe some lenders are issuing revised Loan Estimates too frequently, certainly more often than required by regulation. I believe this is, in part, because the industry still considers the LE a replacement for the GFE. I believe that, while there are certainly cases where it makes sense to issue a revised LE for customer-service purposes only, that in many cases lenders would benefit from issuing revised LEs less often (increase in efficiency and decrease in risk of mistakes).
Previously, we had the “magic GFE”, which could be updated all the way up until the closing itself. Indeed, the GFE (and related regulations) were such that the GFE served as the primary method of updating the borrower with any and all changes to the loan terms, and at almost any stage in the process. After all, the GFE may be the only document the borrower sees that really helps explain the loan’s terms until they get to closing table. And even then the GFE was often over-used (But, of course, carrying only RESPA, not TILA, penalties, the industry felt more comfortable with a quick trigger for redisclosure on the GFE than it should with the current LE).
Analysis: New Way of Doing Things
But the Loan Estimate is not designed to update the consumer with every change in loan term at every stage in the process. Why not? Because we have a Closing Disclosure! Unlike under the GFE regime, now we have a disclosure that’s primary purpose is to provide a more accurate disclosure in advance of closing and that is prepared (normally) by the lender. There is no need for us to issue an LE in many cases because the borrower is going to get a CD (from us) in plenty of time to avoid surprises at closing. CD is issued in plenty of time before closing.
The downsides of issuing revised LEs too often include:
Inefficiency – you might be surprised how much time would be saved, when you apply a several minutes, several times, across thousands of loans (and this is especially true if disclosing is being done in a very thorough, proficient manner)
Increased risk – every time a Loan Estimate is issued, no matter the reason, the lender has the obligation to use all reasonably available information as of that moment in time to provide a good faith estimate of costs and fees. That means, every time we revise an LE we’re taking a risk about making another mistake.
So the next step towards using the LE more effectively is to clearly understand when a revised LE is not necessary. Let’s do that now.
First of all, strictly speaking a revised LE is never required. If you’re willing to issue refunds – you can avoid revised LEs altogether. I think that’s helpful to understand theoretically. If a 0% tolerance fee disclosed on the initial LE goes up by $1.00, there is nothing that says you MUST redisclose. But, assuming there is a valid changed circumstance, you can increase your estimate by $1.00. The benefit is just avoiding a $1.00 refund – is it worth it to you?
But theory aside – the regulatory requirement is that a revised LE is necessary to avoid a cure tolerance refund only when costs previously disclosed increase above any applicable tolerance. Here’s a list of things that, by themselves, do NOT trigger the requirement for a revised Loan Estimate (and as uncomfortable as this might make us, remember we can’t treat the LE as a GFE replacement!)
Change in Loan Amount*
Interest rate change
Property address change
Adding/removing a borrower
Correcting a spelling error in a key item such as borrower name
Removal of PMI
Change in Loan Product or Term
Change in APR
Increase in fee that is not subject to 0% or 10% tolernace
Decrease in any fee whatsoever (except lender credit)
Increase in fee subject to 10% tolerance when change is within 10%
I know, reading some of the items on that list and planning not to re-disclose an LE makes you uncomfortable. That’s the point of this newsletter.
*Remember that the item does not ITSELF require a revised LE – often items such an increase in the Loan Amount will cause an increase to a tolerance item above applicable tolerance, thus indirectly triggering a revised LE.
**Still debate over this. It is my opinion that a rate lock itself does not require a revised LE to be issued (although it represents a valid changed circumstance if needed). But safe bet is to continue issuing revised LE here until regulators all agree on this.
When the CFPB introduced the Loan Estimate, it gave our industry a new process – not just a new form. Updating our processes to incorporate the Loan Estimate required more than just about pulling up existing procedures, crossing out “GFE”, and writing in “Loan Estimate.” Nonetheless, that was basically how most lenders handled the transition. Employees still think of the LE as a GFE-replacement, when it’s really a whole different animal.
Lenders issue revised Loan Estimates too frequently. Best Practice: Except for rare cases, lenders should issue Loan Estimates only when necessary to accomplish tolerance cures. Lenders should get comfortable relying on the Closing Disclosure to disclose other changes.
In Other News
If you haven’t already, sign up for SCA’s free annual technology luncheon – coming up on October 5th. We’re being hosted by the generous folks at Bank of Canton. Click here for more information, to sign up, and also to complete a survey if you have time. Paul and Lance will be providing an unbiased set of information on cutting edge mortgage technology systems – unfiltered and based on their real-life experiences. And Bill Dolan is bringing lunch!
Anybody attending NEMBC this week? Catch up with John, Bill, or another one of your friends at SCA!
On My Mind …
Here’s to people who are passionate about their jobs. You know, that Bruce Springsteen-style passion where you get the feeling they’d run through a wall to help a colleague, a client, or just to get the job done.
Not trying to analyze it or even understand – just stopping to appreciate it. Ray Davis of Umpqua Bank writes about “positive passion” in his book Leading for Growth. He reminds us how it starts at the top, about how passion starts with clear strategic vision, etc. But what interested me was about how he described the actual impact:
“Work without passion is just a job; with passion work can be a heroic quest. If you don’t see yourself and your company embarked on a heroic quest–pursuing something you are really passionate about, something that makes challenge and heartache worthwhile–you really should rethink what you’re doing and where you’re going.”
– University of California Study