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#1925541 - 05/22/14 02:32 PM Note modification-immediately after closing?
biz Offline
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Our loan department wants to allow customers to execute and pay a modification fee, immediately after closing, when the rate has gone down, after the loan has been set for closing. The modification would be executed within a couple days after the closing, and would reduce the rate back to the date of closing on the note. And of course a fee would be charged for this rate reduction. (A fee not disclosed in the final HUD/TIL.)

The only purpose in this is to not delay the closing while allowing the purchaser to get the lower rate. This appears it would keep the sellers and the buyers happy.

Will it keep the examiner gods happy? While it would always be to the customers benefit-I'm afraid it would be seen as circumventing the regs-

Your thoughts would be appreciated. Thank you.

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#1925558 - 05/22/14 02:43 PM Re: Note modification-immediately after closing? biz
RR Joker Offline
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Maybe I'm missing something but why can't you just go ahead and close with the lower rate? Why should it delay anything? Re-doing paperwork shouldn't take but a few minutes.

It sounds like it must be in-house financing, so this is why I ask.
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#1925724 - 05/22/14 05:18 PM Re: Note modification-immediately after closing? biz
Truffle Royale Offline

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Quote:
While it would always be to the customers benefit-I'm afraid it would be seen as circumventing the regs-


Quote:
And of course a fee would be charged for this rate reduction. (A fee not disclosed in the final HUD/TIL.)


And this would be why an examiner would, imho, most likely tear this to shreds.

Joker's right. Lower the rate prior to closing. Hand them the mandated GFE redisclosure at the closing table and be done with it.

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#1926298 - 05/23/14 05:33 PM Re: Note modification-immediately after closing? biz
Dan Persfull Offline
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Maybe I'm missing something but why can't you just go ahead and close with the lower rate?

They wouldn't get the additional modification fee.


Our loan department wants to allow customers to execute and pay a modification fee, immediately after closing, when the rate has gone down, after the loan has been set for closing. The modification would be executed within a couple days after the closing, and would reduce the rate back to the date of closing on the note. And of course a fee would be charged for this rate reduction. (A fee not disclosed in the final HUD/TIL.)


And people wonder why we are in the compliance H E L L we are in now.
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#1927986 - 05/30/14 02:14 PM Re: Note modification-immediately after closing? biz
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They, I think, are trying to offer the customer about to sign papers the best rate available without delaying the closing. Once we have approved a loan at a certain rate, and new lower rates are available, any customer can pay a rate reduction fee and get the lower rate. This can occur any time throughout the application process period. However, if this new rate becomes available the day before closing, in order to allow them to take the lower rate, the closing would have to be rescheduled so the customer can have his 3 day wait period. And you know what that does to sellers and their agents. I believe they are only trying to get around the 3 day wait period. The fee, whether its called a rate reduction fee (and shown in the final HUD) or a modification fee (collected after closing-at time of modifying the new loan), and regardless of when it is paid, is the same amount.

Are you all indicating that you don't charge for rate reductions prior to closing, once a loan has been approved? Do you always give committed applicants the rate available at time of closing?

And perhaps we're missing something, but if the GFE changes, wouldn't they have to wait the 3 days?

Thanks.

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#1928028 - 05/30/14 03:26 PM Re: Note modification-immediately after closing? biz
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the closing would have to be rescheduled so the customer can have his 3 day wait period

What three day wait period. There is no three day wait on a rate reduction. I think you have a huge UDAAP and potential fair lending issue on your hands unless you are dealing with an official rate lock that has been agreed upon between the applicant and the borrower.
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#1928216 - 05/30/14 08:15 PM Re: Note modification-immediately after closing? rlcarey
RR Joker Offline
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And perhaps we're missing something, but if the GFE changes, wouldn't they have to wait the 3 days?


Never do you have to wait for a re-disclosed GFE, but as Randy pointed out...for your APR lowering...you still have no requirement to wait.

Abolish this procedure...you really are asking for a world of trouble.
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#1928317 - 05/31/14 04:19 AM Re: Note modification-immediately after closing? biz
Truffle Royale Offline

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Out of pocket today so just seeing this now.
What you're proposing, biz, is a contradiction to itself and opens up the UDAAP and fair lending issues Randy mentioned above.

You say the borrower can buy down and close at the lowest rate available.
ok...so let them.

That doesn't mean you close at a higher rate first.
That's gouging them at the higher interest for however long it takes to get the modification done, whether that's one day or a week or more.

As I said in my post above, you can lower the rate and do the mandated GFE and hand it to them at right before they start signing closing docs. There is no waiting period!

What you're confusing is the TIL/MDIA 3 day waiting period. Just because you give a new GFE does NOT mean you have to give a new TIL too. You only redo the TIL if the APR changes by +/-.125% That shouldn't happen if you're just lowering the rate.

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#1929926 - 06/05/14 07:46 PM Re: Note modification-immediately after closing? biz
biz Offline
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The new rate would be effective back to the date of closing. And they are trying to avoid the redo of the TIL and that 3 day wait period and thus avoid upsetting the buyer (he gets the new rate); the seller (no delay in closing) and the realtor (who just wants their commission.)

I misspoke above-where I indicated GFE-I did mean TIL. Sorry about that.

Thank you for your comments.

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#1929953 - 06/05/14 08:08 PM Re: Note modification-immediately after closing? biz
Dan Persfull Offline
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IMHO the "modification" fee is in actuality a rate discount fee, or rate lock fee if you'd rather use that term, that affects the APR and if it puts the APR out of tolerace then you are willfully and knowingly circumventing the disclosure requirements of 1026.19(a)(2) with this procedure.
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#1929964 - 06/05/14 08:18 PM Re: Note modification-immediately after closing? biz
rlcarey Online
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You can explain all you want what your rationale is for this process. The fact of the matter is that it is going to get you in deep trouble sooner or later. Fix it going forward and cross your fingers. I will repeat one more time. If you are lowering the rate, there is no three days wait period under Regulation Z. Your argument doesn't hold water.

Additionally, if you are doing this immediately after closing, you need to be fully aware of this from Regulation Z:

Paragraph 17(c)(1)

2. Modification of obligation. The legal obligation normally is presumed to be contained in the note or contract that evidences the agreement. But this presumption is rebutted if another agreement between the parties legally modifies that note or contract.

You need to contact your legal counsel.
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#1930909 - 06/10/14 12:09 PM Re: Note modification-immediately after closing? biz
biz Offline
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I have been in contact with our examiner-the OCC and they indicate that there would be a 3 day wait period. Any advice on how to argue this point with them?

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#1930915 - 06/10/14 12:50 PM Re: Note modification-immediately after closing? biz
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#1930933 - 06/10/14 01:13 PM Re: Note modification-immediately after closing? biz
RR Joker Offline
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I swore I'd never break this down again and could just beat myself silly for not bookmarking where I did it the first (or second, or third) time...and I've probably left something out this time around because I'm hurrying...but I believe this would justify this practice without getting into additional complexities of some of the other verbiage on accurate vs not.

(ii) If the annual percentage rate disclosed under paragraph (a)(1)(i) of this section becomes inaccurate, as defined in §1026.22, the creditor shall provide corrected disclosures with all changed terms.

(2) As a general rule, the annual percentage rate shall be considered accurate if it is not more than 1/8 of 1 percentage point above or below the annual percentage rate determined in accordance with paragraph (a)(1) of this section.


(4) Mortgage loans. If the annual percentage rate disclosed in a transaction secured by real property or a dwelling varies from the actual rate determined in accordance with paragraph (a)(1) of this section, in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section, the disclosed annual percentage rate shall also be considered accurate if:

(i) The rate results from the disclosed finance charge; and

(ii)(A) The disclosed finance charge would be considered accurate under §1026.18(d)(1); or

(5) Additional tolerance for mortgage loans. In a transaction secured by real property or a dwelling, in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section, if the disclosed finance charge is calculated incorrectly but is considered accurate under § 1026.18(d)(1) or § 1026.23(g) or (h), the disclosed annual percentage rate shall be considered accurate:

(d) Finance charge. The finance charge, using that term, and a brief description such as “the dollar amount the credit will cost you.”

(1) Mortgage loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) shall be treated as accurate if the amount disclosed as the finance charge:

(i) Is understated by no more than $100; or

(ii) Is greater than the amount required to be disclosed.
Last edited by RR Joker; 06/10/14 01:14 PM.
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#1930936 - 06/10/14 01:14 PM Re: Note modification-immediately after closing? biz
RR Joker Offline
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Darn Randy.

Oh well...two versions of ammo...yours just has more clout! grin
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#1930963 - 06/10/14 02:07 PM Re: Note modification-immediately after closing? biz
Dan Persfull Offline
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If you are regulated by the FDIC they require the wait period regardless if the tolerance is up or down. BTW, I totally agree with that interpretation and have offered an analysis when the MDIA first came out.

Also don't overlook this from the above link:

CONCLUSION

Lenders must be very careful in assuming that overstated APRs do not trigger redisclosure and a three-business-day waiting period. Make sure your system is not automatically set up to generate corrected TILA disclosures only if the disclosed APR is understated. To apply the MDIA rules correctly and avoid violations of Regulation Z, lenders must determine the cause of the overstatement.
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#1930970 - 06/10/14 02:13 PM Re: Note modification-immediately after closing? Dan Persfull
RR Joker Offline
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Quote:
If you are regulated by the FDIC they require the wait period regardless if the tolerance is up or down


I sure hope not...and didn't have an issue at prior exam. I know the FRB did not take that stance, so long as it was a legitimate FC issue, which included a lower rate.

Dan, do you have something carte blanc from the FDIC on this or is this the opinion of your region?
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#1930988 - 06/10/14 02:31 PM Re: Note modification-immediately after closing? biz
Dan Persfull Offline
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I can only speak for my Region. They have examined based on that assumption since the inception of MDIA. I have never questioned it because as I said I 100% agree with the interpretation.

And the Fed link that everyone refers to makes it clear that one should not assume an overstated APR does not trigger redisclosure. The overstated APR is based on if an error occurred in disclosing the APR, not if the FI changed the rate.

Anyway you have to look to your regulator for guidance and it appears the OCC has taken the stance that the wait period applies if the out of tolerance is up or down. Again I agree with that stance and have since the inception of MDIA.
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#1930999 - 06/10/14 02:40 PM Re: Note modification-immediately after closing? biz
RR Joker Offline
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The way the FRB explained it to me (just for a different viewpoint) was (and this really happened).

It does not work if you pull the APR out of your 'hat' for an early disclosure and then 'correct' it for the final. For lowering of the rate (which is a FC)or a ppfc, then the following applies as to accuracy:

(ii)Is greater than the amount required to be disclosed.
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#1931229 - 06/10/14 08:43 PM Re: Note modification-immediately after closing? Dan Persfull
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Originally Posted By: Dan Persfull
If you are regulated by the FDIC they require the wait period regardless if the tolerance is up or down. BTW, I totally agree with that interpretation and have offered an analysis when the MDIA first came out.

Also don't overlook this from the above link:

CONCLUSION

Lenders must be very careful in assuming that overstated APRs do not trigger redisclosure and a three-business-day waiting period. Make sure your system is not automatically set up to generate corrected TILA disclosures only if the disclosed APR is understated. To apply the MDIA rules correctly and avoid violations of Regulation Z, lenders must determine the cause of the overstatement.


I believe it is more than the FDIC who has been interpreting the overstatement and understatement the same way.

You did an analysis of this a few years ago that I think was spot on. If I can find the link to the old thread I will post it here. I have been following the responses here and I think a few posters are mixing up what is actually causing the APR variation and how it applies.

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#1931232 - 06/10/14 08:47 PM Re: Note modification-immediately after closing? biz
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#1935314 - 06/24/14 08:57 PM Re: Note modification-immediately after closing? biz
biz Offline
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I also brought this up at a recent compliance meeting held by FIS. They too agreed with re-disclosure and three day waiting period. However they did indicate that this is covered in a "proposed" rule that says redisclosure is necessary only if the APR increases.

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#1935337 - 06/24/14 09:53 PM Re: Note modification-immediately after closing? biz
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I know there are differing opinions and views on this but the Fed wrote this regulation and also wrote the interpretation that Randy provided. Not sure how or why the FDIC would try to make their own interpretation but it is what it is!
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