Confused about the “Good Faith” Effect?
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As you are probably well aware, TRID 2.0 blew up the changed circumstance world when it comes to revised Loan Estimates and Closing Disclosures. Are you struggling with the “Good Faith” Effect it created that took effect on October 1st? If so, we want to help!
TRID 2.0 requires that any revised disclosure (used to reset tolerances and/or for informational purposes) you provide…must be based on the best information reasonably available to you at the time it is provided. For example, say you issue a revised disclosure to reflect a higher loan amount. If there are other charges, unrelated to the loan amount increase, that have also changed, they must be reflected on the revised disclosure. However, the changes in the other charges, unrelated to the loan amount change, may not be used to determine either the 0% or 10% tolerance.
We’ve created a tool that will help guide you through and understand this difficult concept. Check out the video as Jerod Moyer explains this in more detail and walks you through the tool step by step.
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Video Transcript Below!
Is your team still struggling with the TRID good-faith effect? The TRID 2.0 change that kind of blew up the change circumstances world. If so, you’re in luck!
Hi there, this is Jared Moyer with Banker’s Compliance Consulting. Today the topic is TRID and the good-faith effect, and I’m going to use some illustrations and talk about the concept that TRID 2.0 brought to the table that was really the most complex and challenging thing based on those October 1st, 2018 changes. Also, I’m going to give you a resource tool at the end of the program, so we need to have a little bit of background here before we can understand how everything kind of works.
As we get into the concept, first off, when it comes to revising the loan estimate, it works like this: when you encounter a change of circumstance, and that change of circumstance affects a tolerance-related item. What you have to do is within three days of learning of the changed circumstance at hand, you need to issue a revised loan estimate based on that change of circumstance, and in doing so, if you do that within three days, it resets the tolerance baseline for those fees associated with that change circumstance at hand.
How the TRID Rule Has Changed
Now, under TRID 1.0, the original rule worked like this: when you encountered that change of circumstance you only adjusted those things that were affected by the specific changed circumstance of hand. I need you all to flush that way of thinking, that’s not the way it’s done anymore. Going forward, under TRID 2.0, when you are going to revise a loan estimate based on a legitimate change circumstance, not only do you need to update the information related directly with the change circumstance of hand, everything else also has to be the most up-to-date and accurate as it can be at the time the disclosure goes out. In other words, no more just updating the information that’s related to the change circumstance at hand. If there’s other information that has come into your possession since the last loan estimate went out, you will also update that information on the loan estimate that you’re revising to reset the tolerance baseline, based on the change circumstance that’s in front of you now.
When we do that things get really complicated, because at the end of the day what happens is you issue this revised loan estimate, based on the best information available, including the informational the change circumstance of hand. The idea is the entire three-page loan estimate is the most accurate from top to bottom, from section one to the last section on the bottom of page three as it can be, at the time it goes out. However, you can only use the information that you updated related to the change circumstance at hand for accuracy tolerance comparisons. In other words, even though the rest of that information on that piece of paper is deemed to be accurate if it wasn’t associated with the change circumstance that caused the re-disclosure, that information can’t be used for accuracy purposes.
This TRID Tool Will Clear Up Your Confusion
I know what some of you are thinking: you’re going, “What in the world did he just say? And how in the world am I supposed to apply that?” Well again, you’re in luck. I’m gonna show you a resource tool that I’m going to share with everyone. You’ll have the ability to go and download this after the program, and where you’ll be able to walk through it again and again. Maybe shut the doors and listen to it so that you understand fully the concept that I wanted to effect actually back on October 1st of 2018. So here’s a glance at the resource tool now. I know, you just take a glance and you go, “What in the world is that!?” It looks complicated and you’re already wanting to cash out. Stay with me. Trust me, at the conclusion of this, I think you’ll have a better understanding.
I can’t promise that your system or your software is going to be able to do it, I understand, but I do know that you’ll understand it and you’ll have a better way to explain it to your team and the people that are providing you your loan and the software to do the things that are necessary to comply with this requirement. So this is what we’re gonna walk through — We’re gonna walk through from left to right the dates that I’m going to use are just general dates, they’re not necessarily anything I’ve picked for any specific reason, but gonna walkthrough from left to right and explain to you the good faith effect on the revised loan estimate and closing disclosure.
TRID 2.0 Walk-through Using This Tool
So, the first thing that’s going to happen moving from left to right is on January 5th, I issued a loan estimate and I made a mistake. I forgot the appraisal now right out of the gates. What we know based on the trade rules is that I can’t charge the borrower for that appraisal I fail to disclose. That’s going to be a tolerance here I’m gonna give. When we get to the closing disclosure I’ll explain how that’s done when we get there. Now, in this circumstance my loan estimate goes out before the bank gets into their possession a purchase agreement because I’m going to show you in the next column, January 8th, is we actually get the purchase agreement in our possession. Now, the first thing that we’re going to do is want a date stamp. We care about the date that it came in. Why? Because when auditors and examiner’s open up our loan file, they should be able to tell that the information on the purchase agreement did or did not affect the original estimate that went out. In other words: if it came in before the original loan estimate goes out, then we would expect the lender to have done their homework and read through the purchase agreement, and then anything that is affected on the loan estimate by that purchase agreement should have made its way to the loan estimate.
In this case, it comes in after the purchase or after the loan estimate that was delivered on January 5th, meaning that we’re gonna still care. We’re gonna date stamp it. We’re gonna read through it to see if there’s anything that would be a legitimate change circumstance that would affect a tolerance item.
How to Approach Changes
Now, I did the homework already. I read through the purchase agreement there’s nothing in here that would equate to a legitimate change circumstance where I would need to issue a revised disclosure so that I could reset tolerances. So we’re just going to note that it came in on the 8th. Now, that’s important because of the new good faith requirement that TRID 2.0 brought to the table. If we encounter another legitimate change circumstance down the road and we reset tolerances, this new information that came in on January 8th will have to make its way to the next revised disclosure if we encounter one down the road. Now, that’s just what’s going to happen on January 14th. What we learn is that if the borrower wants to increase the loan amount, say they want to go from a hundred to a hundred and twenty-five thousand. So it’s a borrower requested change circumstance. Now at my bank, what we do is we charge a percentage-based origination – treat 1% of the loan amount. We want to be able to capture the additional origination fee income that comes with the borrower increasing their loan amount from a hundred thousand to one hundred and twenty-five thousand. That’s an extra two hundred fifty dollars of income, and we’re going to try and get that. So, we’re gonna have to reissue the loan estimate in connection with this change circumstance within three days of learning of it.
Getting the Numbers Right Under TRID 2.0
Now, we’re going to have to those things directly associated with the change circumstance at hand so that we can reset the tolerances associated with those items. Things like the origination fee that’s a percentage of the loan amount. Things like the title insurance that’s based on the loan amount, the lenders title insurance. Those are all things tied to a tolerance that we want to reset the baseline based on the information that was brought to the table. now we also forgot the appraisal. Back on the original loan estimate: we’re still not going to go and add that back, we’re also going to ignore the fact that we’re gonna have to pay for that charge. We’re going to show that all when we could get to the closing disclosure. So at this point on January 14th, we’re going to address those things directly associated with the change circumstance at hand. Everything to do with the loan amount, but we also have to update anything in that purchase and agreement that came in January 8th and add that to our January 14th loan estimate as well. And, you’ll see that’s what those paragraphs are walking you through on this form when you download it. Again, you’ll want to go back and read that. Now, on January 18th we’ll get the actual bill for title insurance, it’s not a change circumstance, it’s just they’ve sent us the actual bill for what the title insurance is going to be. Do we care? The answer is absolutely yes. We’re going to date stamp the day we got the bill for the actual title insurance. The reason we care if we ever have to provide another loan estimate, we’re going to have to update from what was the estimate for insurance to the exactment for title insurance based on this new final bill that came in.
How to Identify a Change Circumstance
It’s not a change circumstance there’s no new information other than the final bill, but it is something that wouldn’t have to account for if we have to ever issue a revised loan estimate, and that’s just what’s going to happen when January 22nd comes along. When we encounter a legitimate change circumstance, the appraiser goes out and they get all the information so they can do their appraisal, and they identify that there’s something wrong with the structure. There’s a hole in the roof or something like that and they come back to the bank and say, “Alright we’ve done the appraisal, this hole in the roof has to be repaired before I’ll sign off on the appraisal, and in order to do that I’m gonna have to drive back out there and do another inspection, and I charge $100 to do an inspection.”
When it comes to repairs that need to be made, two buildings that I’m doing appraisals on, and the bank then wants to be able to pass that hundred-dollar inspection fee or re-inspection fee on to the borrower. Well, that’s a change circumstance learning of the new information to hole in the roof within three days of learning of that additional hundred dollar inspection fee. We’re going to have to issue a revised loan estimate within three days to reset that tolerance baseline.
Okay, so we’re going to do that, but what we also now have to do is take the January 18th time insurance bill we have to update this loan estimate. Now, here’s where it gets a little bit complicated. You’re gonna update the title insurance bill from the 18th on the January 22nd loan estimate. That’s gonna make it the most accurate it can be when it goes out the door. However, that updated final title insurance number that you use on the January 22nd loan estimate cannot be used for tolerance purposes.
For tolerance purposes, you’re gonna go back to one of the previous loan estimates. Okay, it would actually be that loan out, or the January 14th loan estimate that’d be the latest change circumstance-related estimate for title insurance. Hey, you would not use the updated number on the 18th bill, so that’s what’s going on on the January 22nd column. Now, we’re ready to close. Now, there’s a lot going on at closing.
The first thing I want to let you know is in that first paragraph in the January 31st column, the borrower has chosen at the last minute that they don’t want to escrow, and our bank said, “okay, you don’t want to ask Joe, we won’t make you escrow, but we charge a thing called an escrow waiver fee.” So they say, “yeah, I’ll pay the escrow waiver fee.” So in order to be able to charge that escrow waiver for you, which is a zero percent tolerance, we have to issue a revised closing disclosure. In this case, it’s going to be the closing disclosure that’s gonna show that feat, and I’ll explain how this all works in a minute.
This is the effect of the black hole closing for TRID.
You can use a closing disclosure to effect a change circumstance. I mentioned revised closing disclosure, but that’s not what this is. This is the closing disclosure where we can show the escrow waiver fee for the first time ever on the closing disclosure, as long as it’s within three days of learning that the borrower doesn’t want to escrow and that there will be a fee for that. So that’s what you’ll see in that first paragraph in the January 31st column.
Now, the next thing that I want to mention is in the second paragraph. In that column, one of the things that causes a lot of confusion is the cash-to-close table on page 3 of the closing disclosure. That cash-to-close table has a loan estimate column and a final column. In the loan estimate column, the numbers there come from the last piece of paper provided by the lender. In other words, the January 22nd loan estimate numbers are what you will use in the loan estimate column on page 3 of the closing disclosure.
In cash-to-close, it is not used at all for tolerances, it’s simply numbers taken from a piece of paper, and they get put in the cash-to-close section, and you compare the closing disclosure to it, but not for tolerance purposes. So, that’s the second paragraph that you’ll see in the January 31st column.
Different Number of Disclosure Loan Estimates
Now, for the next item for tolerance purposes, we’re going to be comparing our closing disclosure numbers back to a number of different disclosures loan estimates, and even closing disclosures for that matter. This is where it gets complicated. The appraisal fee it’s actually going to show up on our closing disclosure, and we’re going to do it in the paid by others column. Okay, you’re gonna compare it back to the original loan estimate, and that’s why you’re doing the paid for by others column. You can’t pass it on to the bar because you fail to disclose it.
The paid for by others column is your cure to that tolerance there. Hey, that’s why you’re gonna disclose it. There, the origination fee that you’re gonna compare not back to the original loan, but it’s gonna go back to the January 14th loan estimate. That’s where we had to change circumstance where we increased the origination fee based on the loan amount going up. The inspection fee, well that doesn’t show up on any of the loan estimates until the January 22nd loan estimate.
So, the closing disclosure inspection fee for the bar: the appraised driving to go out and re-inspect, that’s gonna be compared back to our January 22nd loan estimate. Now at this point, just at a glance at the screen, you’re gonna notice that we’ve compared our closing disclosure back to each of the three loan estimates. We’re not quite done yet.
Lenders Title Insurance
Hey, first off, the lenders title insurance. We’re gonna go back to the January 14th loan estimate. Why? Because the fifth would have our original estimate. We have to change circumstance. The 22nd would have the actual, and that we can’t use for accuracy purposes. For accuracy purposes, we take the January 14th, and then we have something very interesting happen. In the January 31st column, the first thing I hit you with was the borrower didn’t want to escrow, so you charge a fee for that. You do that within three days of learning that. They don’t want to ask. We’re now going to compare the closing disclosure to itself, I know that seems odd, but that escrow waiver fee does not show up on the loan estimates the change circumstance, which was affected by the closing disclosure that you issued, and it was in their hands at least three days before closing.
In this case, you’re comparing the closing disclosure to itself, and in all other fees, and charges back to the original January 5th loan estimate. This is a concept that many are still struggling wit:. The good faith effect on revised disclosures, and it’s not just limited to loan estimates, because you can see in our January 31st column, closing disclosures are also affected by this. Hey, most systems are still struggling to deal with this okay! Keep working at it, take notes along the way, write your story.
Want to Learn more about TRID 2.0
If this is something you’re hearing for the first time right, and you want a more in-depth analysis on this, I’d love to invite you and your team to join us for an upcoming webinar that is the TRID change circumstances and revised disclosures. We’re going to be spending two hours on those issues that will include the information you see on the screen relating to the good faith effect.
We’d love to have you join us, and as always we’ll be providing it to you in a plain English setting.
We look forward to seeing you thanks!
Jerod is the leader of Banker’s Compliance Consulting’s training productions. He is a nationally recognized speaker. Whether it’s a conference, seminar, school, webinar, or luncheon, it’s easy to stay engaged when he presents due to the amount of passion and energy he brings to each and every compliance topic. Jerod has spoken on behalf of the American Bankers’ Association, BankersOnline, many state banking associations, private compliance groups, and financial institutions. He is a Certified Regulatory Compliance Manager (CRCM) and BankersOnline Guru.
Jerod likes to spend his time (between reading regulations and producing compliance training!) relaxing at the lake with his wife and three children, following their activities or engaged in something sports related!