In the TRID A-Z Series Jerod talks about the “Good Faith” Tolerances.
On page 18, we’re going to introduce you to the good faith tolerances, and this is the first of three different portions or three different sections in our three-part series that we’re going to talk about good faith in depth. We’re going to talk about producing the loan estimate and doing so in good faith. When we talk about changed circumstances later on in the program, we’ll also bring good faith back to the table. And then in our third segment, when we talk about revising the closing disclosure, in addition to actually completing the accurate information on the closing disclosure, we’ll also talk about this good faith standard. But we’re going to go into it just a little more in-depth here and kind of make sure everybody’s singing from the same sheet of music. That should make us get through some of the following sections in a little bit more of an expedited manner.
So, here’s what good faith means.
Page 18, very top of the page, there are two paragraphs and there’s some bold information. Let me call out just a few things that are bold. It means that it’s based on the best information reasonably available. That’s the second line in that first paragraph. What’s that mean? Well, it means there’s this expectation that the lender exercise due diligence in obtaining information. What’s all that mean? Well, we said we’re going to talk plain English today. It means you’ve done your homework. It means that you haven’t just thrown darts at the wall or pulled numbers out of the sky, that you’ve reached out to insurance agents, that you’ve reached out to realtors, title companies, investors, government offices. Wherever the information is coming from or should come from, we’ve reached out. We don’t just guess.
Along the way, as you’re putting this together to build your loan estimate, what matters is what did you know and when did you know it?
For example, if you look down towards the bottom of the page, page number 18, we’ve got these different tolerances. I’ll come back to the zero-tolerance here in a minute, but let’s talk about the appraisal. We’re talking about this good faith standard, making sure you’ve done your homework. What did you know? When did you know it? One of the items that comes up within the zero-tolerance section is going to be third-party services required by the lender, where the lender picks the provider. Now, in my list of items in number six, I list four things. Three of them are absolute; credit reports, flood determinations, and appraisals. You’re never going to let somebody shop for those because there’s independence and conflicts of interest risk that you’re trying to avoid.
Let’s talk about the appraisal. You probably have an approved appraiser’s list. You’ve done some homework on that. There are other regulatory requirements, by the way, within Reg Z, that state that you should have done that homework. So you likely already know that for your approved appraiser’s list, let’s just say there are 10 of them, that the range in fees is somewhere between $400 and $500 because they need to be relatively close for the same work performed. Since we’ve done that homework and that’s the range for a typical one to four-family appraisal in our typical lending area, that means some of the time, it’s going to be $500 and some as low as $400.
Can we put $500 on all of our loan estimates since we don’t know which appraiser’s going to be utilizing a connection with that transaction due to conflict of interest and independence requirements? Can we put $500 on all of our loan estimates for a typical one to four in our typical lending area? And the answer is absolutely you can, but you better hit $500 some of the time. Because good faith would not be saying, “Okay, $500, but let’s just add another $100 just in case.” That’s not good faith. That’s not the best information reasonably available at the time the disclosure goes out.
So I’ll go back to, what did you know and when did you know it? When you’re putting together the information for the estimate for the appraisal, what do you know about the property? If you know very little, $500 probably works. But let’s say you know that it’s also an 80-acre property instead of a quarter acre. That needs to be accounted for. It’s a historic home rather than a typical one to four. Then that should be accounted for. Those are all things that likely your appraiser charges a little bit more for and that you should have taken into account when you do the estimate for the appraisal. So, those details matter.
You’ve got to document the story.
If you leave the details out, what you’re doing is leaving things to the imagination of the auditor or the examiner when they pick up the file and start to look through it and try to figure out what’s going on. If you had the information before the loan estimate goes out, that information should have been accounted for in putting together the estimate to meet the good faith standard. If you didn’t get the information until after the loan estimate went out, then we wouldn’t expect that it would’ve been utilized in connection with coming up with the good faith estimate of the dollar amount that’s on your loan estimate, so document when things come into your possession.
For example, in the purchase agreement, if you have it before the loan estimate goes out, it should have been reviewed in full to see if it impacted the loan estimate. If it didn’t come into your possession until after the loan estimate went out, it should be documented that it didn’t come in until after. Dates matter. Date stamp things when they come into your possession. Again, the story in those details matters.
Good Faith Tolerance
After watching the video above you should have a basic understanding of these key concepts:
- Best Information Available
- What it Means to “Do Your Homework”
- “Good Faith” Tolerances
- Zero Tolerance
- Details Matter, Tell the Story
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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!