BLOG VIEW: Everyone knows the story of Goldilocks and the Three Bears. Goldilocks was all about everything being “just right” – her porridge; her chair; her bed, etc.
When it comes to disclosing fees on a loan estimate (LE), the Consumer Financial Protection Bureau (CFPB) is a lot like Goldilocks. They want to see that a lender’s estimates are just right – not too high, not too low.
Now, anyone who is involved in preparing LEs is likely well-versed in the regulations and consequences around estimating fees too low (i.e., the potential for tolerance violations and monetary cures). This article isn’t about tolerance violations and under-disclosure; but rather it is about the less-talked-about (but potentially much uglier) cousin of under-disclosure: over-disclosure. In particular, intentional or knowing over-disclosure, a.k.a. “padding.”
What does the CFPB’s TILA-RESPA Integrated Disclosures (TRID) rule say about “padding”? Well, nothing directly, which is probably why you don’t hear about it as much in the industry. But the prohibition against padding is there, lurking between the lines of TRID – and, like the bears in this fable, the prohibition has a scary set of teeth.
Before we talk about those chompers, let’s dive into the regulations and see exactly where the prohibition against padding comes from. TRID states that all fees disclosed on an LE (regardless of which specific tolerance restrictions apply) must be provided “in good faith.” “Good faith” means that, if any information necessary for an accurate fee estimate is unknown at the time of disclosure, a lender must estimate fees based on the “best information reasonably available,” while exercising appropriate due diligence in obtaining that information.
So there it is, hiding in plain sight within the text of the regulations. TRID requires lenders to estimate all fees on an LE to the highest degree of accuracy possible, based on the best information reasonably available at the time. Thus, a fee estimate that a lender knows (or should know) is too high constitutes a TRID violation just the same as one that is too low.
Now let’s take a closer look at those chompers. We all know there are no tolerance cure implications for disclosing too high (and therein lies the temptation to do it intentionally), but that doesn’t mean there are no financial consequences. Far from it, in fact. The financial consequences come in the form of statutory fines and potential class action liability – and, trust me, they will leave you wishing you only had tolerance cures to worry about.
Dodd-Frank provides civil monetary penalties for TRID violations in three tiers. The first, which is the lowest tier, applies to any TRID violation and carries fines of up to $5,000 per violation per day. The second, or middle tier, applies to reckless violations of TRID and carries fines of up to $25,000 per violation per day. And the third, which is the highest tier and applies to knowing violations, carries fines of up to $1,000,000 per violation, per day.
That means even a mere careless over-disclosure of fees (i.e., one that results from simple negligence in a lender’s duty to obtain the best information reasonably available) could lead to fines in the many thousands of dollars. But intentional over-disclosure of fees, or “padding”? That would be a knowing violation of TRID and potentially subject to tier-three penalties of $1,000,000 per violation, per day. All of a sudden those tolerance cures are looking pretty puny, eh?
But wait, there’s more! The CFPB is likely to view padding as an attempt to evade TRID’s tolerance requirements, and thus consider it a bad faith violation. And the CFPB generally doesn’t look too kindly on bad faith violations, which means they might be inclined to make an example of an offender. When the CFPB does that, you can bet there will be a UDAAP violation coming your way, as well. So, potentially, another tier-three Dodd-Frank penalty, for an additional $1 million. (Per violation. Per day.)
And don’t forget about that class action liability. In case the multimillion dollar statutory penalties weren’t enough to get your attention, you could also face the prospect of a private lawsuit (or suits) for fee padding. It’s currently unclear whether TRID’s disclosure requirements are enforceable through private right of action, but there’s no question that UDAAP violations are. So, even if you manage to evade the wrath of the CFPB, you’ve also got every class action law firm in the country to worry about (and potentially unlimited financial liability for actual damages).
The moral of this story isn’t that lenders need to ensure every fee estimate on their LEs is 100% accurate or else face crippling fines and liabilities. The LE is called the loan “estimate” because it’s often not possible to know exact fee amounts at the time it is issued. Lenders have no choice but to make estimates in those circumstances.
But they still have an obligation to make sure those estimates are reasonable, so it would be wise to employ the best tools and information to ensure the highest level of accuracy possible. Because when Goldilocks comes calling (that would be the CFPB), she’s going to want to see “Baby Bear” fee estimates on your LEs: not too high, not too low – just right.
Michael Cremata is senior counsel and director of compliance at ClosingCorp Inc., a provider of residential real estate closing cost data and technology for the mortgage and real estate services industries.