When it rains it pours, and lately it’s been raining questions about lender credits for me. Maybe it’s the Baader-Meinhof Phenomenon, or maybe lenders are being more generous or creative with their credits lately, I’m not sure. But either way, it’s a good excuse to talk about lender credits (as if an excuse is even needed).
A bit of general advice first: don’t over-complicate lender credits. Funding a loan can be complicated, but this is not. There are two types of lender credits: general credits and specific credits. That’s it. And remember that the regulations should be read from the consumer’s perspective, so some of the behind-the-scenes funding moves might be hidden on the disclosures. But I’ll go into that.
Specific Lender Credits
These credits are pretty much exactly what they sound like: they are credits that pay for a specific line-item closing cost. If you can’t attribute the credit to a single cost, then it is not a specific lender credit. For example, if you advertise that you will pay for the appraisal for a loan, then that’s a specific lender credit. The credit will be applied to that particular fee no matter what the actual cost of the appraisal is.
Be careful when disclosing specific lender credits. As I’ll discuss below, specific lender credits aren’t identified on the LE, and overestimating the cost of a lender credit early on can have tolerance and good faith analysis implications. Generally, when estimating the amount of lender credits for specific fees on the LE, it is better to underestimate what the potential credit will be.
If you provide credits but can’t identify a specific fee which the credits are allocated to pay for, then they are general credits. It doesn’t matter the source of the funds, where they are used, what or the reason for the credit; if it’s not tied to a particular fee, it’s a general lender credit. This can include certain rebates or special state programs too. For example, if a state housing program subsidizes affordable housing by reimbursing lenders for closing cost credits, the credits the lender provides the borrower at closing are general lender credits even though the lender is reimbursed post-closing.
The CD is a snapshot at the borrower’s costs at the time of closing, and the borrower doesn’t see or care about whether the lender is reimbursed for the credit. All the borrower knows is his or her closing costs are lower.
Disclosing Specific and General Lender Credits
Specific lender credits are disclosed in the “Paid by Others” column of the CD. General lender credits are disclosed in Section J of the CD.
But the LE does not have a “Paid by Others” column. Therefore, you cannot differentiate between specific and general lender credits on the LE. They are both lumped together.
This is where you must be careful when estimating specific lender credits.
Say you agree to pay for the appraisal for a transaction, and estimate on the LE that it will cost $750. However, as it turns out, the appraisal only actually cost $500. You disclose on the “appraisal” line that the $500 fee was “Paid by Others” to show a specific lender credit for that fee.
You are still $250 lender credits short of what was disclosed on the LE though. The CFPB views this as an increased cost to the consumer, even though from Day 1 the LE credit was only intended to reflect the cost of the appraisal and nothing more. You would have to either re-disclose or provide $250 of general lender credits, and no one wants to do that.
As a rule, the lender may increase the lender credits provided, but they cannot decrease them.
That’s why it’s better to underestimate. If you estimate that appraisals can be between $300 and $750, then estimate lender credits of $300 (if you wish to estimate any at all). If the appraisal costs $500, then you can increase the lender credits to $500 without having to re-disclose; but if you overestimate, then you’re in trouble.
This is true for “no-cost” loans as well. If you’re unsure about the exact costs to close a no-cost loan when you provide the LE, then keep the estimate of the lender credits provided as low as possible. Once the actual costs are known, you can always increase the credits to ensure you stand by your no-cost pledge. But if you overestimate from the beginning, you risk going from simply covering the closing costs to actually paying the borrower to borrow money from you.
(For more info on lender credits, see 12 CFR 1026.19(e)(3)(i)—Comment 5; or the CFPB’s Guide to the Loan Estimate and Closing Disclosure forms, page 69.)
Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184