As we approach the end of 2023, we wanted to take some time to reflect and comment on some of the most common lending missteps we’ve seen while performing audits for Clients during the year. TCA’s Top Five are firmly rooted in two regulations that examiners spend much time and focus on.
Regulation Z and the National Flood Disaster Protection Act.
Regulation Z has been around for a number of years and clearly underscores consumer protection by setting rules that protect consumers from paying more than was disclosed (APR/Finance Charge and Disclosure requirements), allow them time to contemplate the transaction (Rescission) and to fully understand the transaction they are entering (TRID). The National Flood Disaster Protection Act (Flood) is a perennial focus for examiners.
A pattern and practice of non-compliance with either of these regulations can result in customer restitution, regulatory criticism, and potential civil money penalties. Below are the most common missteps we’ve seen our clients have this year and the solutions we recommend.
- Rising interest rates boost ARM popularity – Consumers increasingly opt for adjustable-rate mortgages (ARMs) to avoid high fixed-rate rates. However, the popularity of these financial products has created fresh compliance challenges for banks, including:
- A mismatch between the index on the note and the Closing Disclosure. The one-year Daily CMT and the one-year Weekly Average CMT are two different indices.
Recommendation: Once you choose an index, use it consistently throughout the file. Make sure it is “locked down” in your origination system to avoid an incorrect index selected.
- The naming convention on documents for Index are unclear. Most systems provide limited descriptive space, but it’s critical to describe the index you’re using so borrowers can understand and research it.
Recommendation: Understand the size of the field in your origination system and determine the best way to abbreviate the index for your product. We most commonly see the following: One-year Weekly Average Constant Maturity Treasury described as 1YRWCMT or 1YRWACMT.
- The Index isn’t current at the time of closing. The index used at the time the Loan Estimate was issued may be too old to use when preparing the Closing Disclosure. Under Regulation Z, an index is considered current if it is within 45 days of the note date.
Recommendation: Most origination systems do not “automatically” update indices. Be sure your workflow includes a process to update the index prior to completing your closing documents. You may want to reach out to your Loan Origination Software provider to see if index updates can be programmed into the system.
- Disclosure of Fees on the Closing Disclosure.
- Fee placement when borrowers shop or do not shop services. We’ve seen confusion in determining where to place title fees if a borrower elects to shop or elects not to shop. If you allow borrowers to shop for certain Services, for example Title Services, where the fees are disclosed on the Loan Estimate and Closing Disclosure may differ depending on what the borrower does.
- If you allow shopping of Title Services and your Service Provider List includes 123 Title Company; you disclose these fees in Section C on your Loan Estimate. If the borrower or the seller (in purchase transactions) select 456 Title Company, the borrower shopped for these services and they would be disclosed in Section C on the Closing Disclosure.
- However, if the borrower chose or asked you to choose the Title Company and 123 Title Company was used, the borrower did not shop and fees would be disclosed in Section B and held to a 10% tolerance.
- Calculation of the 10% Fee Tolerance. Speaking of tolerances, it’s not only important to place the fees in the correct section, but it’s also important to know what fees should be included in your calculation. For example, the following fees were disclosed on the Loan Estimate:
- Title – Closing Protection Letter $25
- Title – Documentation Fee $125
- Title – Settlement Closing Fee $1,200
- At closing, the borrower was not charged the Documentation Fee. When determining your 10% tolerance, you cannot include the disclosed Documentation Fee because it was not charged.
Recommendation: Consider adding an “if then” statement or simple flow chart to your workflow and checklist. For example, If borrower selects Title Company from Service Provider List, then fees go in Section B. If Title Company is not on the List, then fees go in Section C”. When it comes to tolerance calculations, most origination systems have programing in place to ensure only the fees charged are included in calculations; however, adding a reminder to a closing checklist/prep sheet may help staff remember.
- Incorrect Completion of the Contact Information Table – When a transaction does not include a real estate broker, the Table is completed with N/A or “000”. TRID rules require these fields to be left blank.
Recommendation: Be sure your workflow includes steps to review this information prior to closing and the actions that must be taken if these fields contain data and should not.
- TRID Disclosure Timing – In refinance transactions, documentation is not found to support borrowers with rescindable rights, received a copy of the Closing Disclosure within three business days prior to consummation. Regulation Z requires that all individuals with a security interest in the property are provided with a copy of the Closing Disclosure within three business days – regardless if they are obligated to the transactions.
Recommendation: It’s important that staff understand that this must be clearly documented. Make sure your procedures include the steps staff must take to document delivery of the CD. If documents are sent electronically (e-Sign compliant), make sure the CD is sent to all individuals with rescindable rights and that each person opens the email so that the date in which it is received is documented. If this does not occur, we must follow the “mail rules” which assumes the individual received it an additional three days after it was sent.
- Untimely Delivery of Flood Notification – The date the Flood Notice was provided to borrowers is not documented or is provided at closing. Borrowers must be provided with a Flood Notice within a “reasonable” time period prior to closing. This includes refinance transactions. It is permissible to reuse a Flood Determination if certain criteria is met; however, the Notice may not be reused and is still required to be provided (yes, even though the borrower knows they are in a flood zone).
Recommendation: Although using an existing Flood Determination is permissible, we recommend a new determination is obtained. This will not only provide you with an updated Determination but also the Notice. If you plan to reuse an existing determination, consider adding a reminder to a checklist so your processors remember to send a new Notice. It’s also a good idea to define in your procedures what your institution considers “reasonable”. Is it 10 days, 7 days, 5 days? TCA does not consider less than 5 days reasonable.
TCA provides A Better Way to help you navigate and understand these errors. Contact us at (800) 934-7347 or [email protected] if you have any questions!
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