Scenario:

Provide customer our settlement servicer list, which has 1 provider on it. Customer indicates he/she has no preference on who we use.

We pick a settlement agent to do the closing and other services, and move forward. Do all the fees go into the 0% tolerance (as we allowed the customer to shop, but they indicated no preference, therefore we "picked" for them?)- or do the fees go into the 10% tolerance section?

10% if you used the settlement provider on your list.

That is what we do. However I am being told by an auditor that they should go in the 0%.

0% is only if they are an affiliate.

Why are they stating 0%? (unless it's an affiliate)

Darth- their argument is that the bank is selecting them, as the borrower did not state that they wanted to select their own, and we should know the fees therefore it should be in the 0%.

For example, if, in the disclosures provided pursuant to §§ 1026.19(e)(1)(i) and 1026.37(f)(3), a creditor discloses an estimated fee for an unaffiliated settlement agent and permits the consumer to shop for that service, but the consumer either does not choose a provider, or chooses a provider identified by the creditor on the written list provided pursuant to § 1026.19(e)(1)(vi)(C), then the estimated settlement agent fee is included with the fees that may, in aggregate, increase by no more than 10 percent for the purposes of § 1026.19(e)(3)(ii). If, however, the consumer chooses a provider that is not on the written list, then good faith is determined according to § 1026.19(e)(3)(iii).

The auditor doesn't get to decide what he or she thinks is right when the regulation or commentary (as Randy Carey has pointed out) specifically answers the question. Your auditor can find the text that Randy excerpted above in comment 19(e)(3)(ii)-3.

This may be a bit of a semantics issue. Although for tolerance purposes, the selected written provider is subject to the 10% rule, for purposes of placement on the Closing Disclosure, the fee is shifted from Section C on the LE to Section B on the CD if the borrower uses the settlement service provided from the WPL. So, it could be that what the auditor is trying to say is that the fee should be itemized in Section B.

12 CFR 1026.38(f)(2)

Under the subheading “Services Borrower Did Not Shop For” and in the applicable columns as described in paragraph (f) of this section, an itemization of the services and corresponding costs for each of the settlement services required by the creditor for which the consumer did not shop in accordance with §1026.19(e)(1)(vi)(A) and that are provided by persons other than the creditor or mortgage broker, the name of the person ultimately receiving the payment for each such amount, and the total of all such itemized amounts that are designated borrower-paid at or before closing. Items that were disclosed pursuant to § 1026.37(f)(3) {Section C of the LE} must be disclosed under this paragraph (f)(2) {Section B of the CD} if the consumer was provided a written list of settlement service providers under § 1026.19(e)(1)(vi)(C) and the consumer selected a settlement service provider contained on that written list.

Definitely, Justin. And, as we can see from the example provided, not all the services listed in Section B of the CloD are subject to §1026.19(e)(3)(i) -- 0% tolerance. If they were in Section C on the LE, and properly included on the creditor's Service Providers List for shopping, a 10% tolerance could apply.

They clarified for me, said that the fee should be in Section B, but be subject to 10%.

I am still not on board with it. We have been doing the same since TRID rolled out and no other loan reviewers (even from the same company) or our auditors have said we needed to change it. This is what I received:

"In instances where the borrower is permitted to shop, but does not choose a provider, and the Bank chooses a provider that is not on the list, the Bank may include these charges with the fees that may, in aggregate, increase by no more than 10 percent. With that being said, we strongly recommend watching those fees to make sure that they are not consistently exceeding the amount disclosed on the Loan Estimate as this could become a potential for a “bait and switch” scenario. Given the recent focus on UDAAP, any complaints received pertaining to this type of activity could open the door for closer scrutiny on the Bank.

As for where to disclose these fees, in accordance with section 1026.38(f)(2), we recommend that the Bank should be disclosing the fees in section B (“Services Borrower Did Not Shop For”) instead of C (“Services Borrower Did Shop For”). While the borrower was “permitted” to shop and was given a written list of providers, they chose not to shop.

Let me get this straight. You provided a list, the customer said I don't care - you pick, then you picked a provider not on your list???

Or did I misunderstand what was said.

We have 1 provider on our list. In Maine, customer is allowed to select their own title attorney. If they elect not to select anyone, we select a provider (may or may not be the one on our list), depends on area.

Then I have a hard time saying you let the customer shop if you didn't even pick a provider that is currently on your preferred list. I think that is going to cause all sort of problems.

We have documentation in file showing the customer elected not to shop (they sign a form), and we provide them a settlement provider list.

We have been doing it this way since TRID rolled out with no issues. So what they are asking us to do now is to put the fee in Section B, but it would be a 10% tolerance item.

They are correct in what they are telling you. Just because nobody ever figured it out before doesn't mean they are telling you wrong this time around. Sometimes you get auditors/examiners with more technical knowledge, sometimes they're focusing on something else, sometimes they just flat out miss things. It's the nature of auditing/examining. Please refer to my answer above and the reference to 12 CFR 1026.38(f)(2). This would be the case if they just went with the provider you listed on the SPL.

However, if you are selecting a provider that is not on the SPL, as RL Carey mentioned above this may cause a lot of issues. One of which may be that this should really be treated as a 0% tolerance item. It gets a little dicey. I understand you are allowing them to shop initially, but then in the end you select for them a company you never disclosed. I guess the root cause of the problem in those cases is you are showing a settle service provider on your SPL that does not seem to be able to provide the service in the area the borrower or property is located. This is a "no-no." On the SPL, you have to provide a company that can actually perform the service in that locale. So, if you are saying that who you select depends on the area, then you need to make sure the initial SPL references a company that can perform the service in that locale.

I agree. I don't think that the CFPB thought for one minute that a creditor would select someone not on their list if the customer opted not to choose a service provider. You are out in no-mans land that could be interpreted by the regulators in a whole variety of ways, including making these charges 0% tolerance.

Interesting. I have our outside audit firm now advising to keep doing it the way we are doing it.

LOL! They want that money from the engagement. Push back enough with an auditor, especially a small firm, and they will cave!!! The piddly assessment amounts that the OCC receives from small community banks isn't going to make or break the agency. We could tell it like it is without fear of going out of a job. That being said, I didn't like to see the community banks flip and go state charter.

Bottom line here is that the service provider list you give MUST show a provider who can do the work in the area the property is in.
You cannot give a list with your local attorney and then, when the borrower says 'I don't care' pick a totally different attorney because the one on the list doesn't work in the area the property is in.
If that's what you're doing and the cost comes in different from what you put on the LE, then I can see where your auditors would say it should be 0% tolerance because it's like you didn't give them a list at all.

What TR says is true. The new proposed comment 19(e)(3)(ii)-2 states: “if the creditor permits the consumer to shop consistent with § 1026.19(e)(1)(vi)(A) but fails to provide the list required by § 1026.19(e)(1)(vi)(C) or the list does not comply with the requirements of § 1026.19(e)(1)(vi)(B) and (C)”. Which makes it zero tolerance. Not giving them a service provider that is geographically close to either the borrower or the property, violates § 1026.19(e)(1)(vi)(C).

Agreed.

Tracey, regarding the scenario where a borrower does not make a selection or choice of service provider for a service that they are allowed to shop and for which you provided a list, it does not matter if the service provider ultimately selected (either by you the Bank or some other party the borrower allows to choose for them) is on or off the list, it will always go in Section B and should be subject to the 10% aggregate. Again, this is in a scenario where you allowed them to shop but they chose not to make a selection or make a choice while leaving it up to another party to do so.

The fact that you allowed them to shop and the choice (not by them) was a service provider OFF the list is not treated the same way as if you allowed them to shop and they actively chose or selected off the list. When they are allowed to shop and they actively choose off the list, it goes in Section C because they are considered to have shopped and it's subject to no tolerance limit. If they are allowed to choose and they do not select or make a choice or they chose from the list, they are considered to not have shopped therefore, it moves to Section B and is subject to the 10% aggregate threshold. Again, if they did not actively make a choice, it does not matter if the service provider that was chosen (say by you the bank) was not on the list. What matters is simply that they did not actively make a selection/choice...therefore, it goes in Section B Did Not Shop and is subject to the 10% aggregate threshold.

I think that is ultimately what you are disputing. The original auditor's guidance/suggestion to you appears to be correct and "outside audit firms" advise to keep doing it the way you are doing it seems to be poor advice.

FYI, the following part of the regulation addresses this: http://www.consumerfinance.gov/eregulations/1026-19/2016-06834#1026-19-e-3-ii-C

Click on the OFFICIAL INTERPRETATION TO 19(e)(3)(ii) and see #3 which is addresses your question.

SERVICES FOR WHICH THE CONSUMER MAY, BUT DOES NOT, SELECT A SETTLEMENT SERVICE PROVIDER.
Good faith is determined pursuant to § 1026.19(e)(3)(ii), instead of § 1026.19(e)(3)(i), if the creditor permits the consumer to shop for a settlement service provider, consistent with § 1026.19(e)(1)(vi)(A). Section 1026.19(e)(3)(ii) provides that if the creditor requires a service in connection with the mortgage loan transaction, and permits the consumer to shop for that service consistent with § 1026.19(e)(1)(vi), but the consumer either does not select a settlement service provider or chooses a settlement service provider identified by the creditor on the list, then good faith is determined pursuant to § 1026.19(e)(3)(ii), instead of § 1026.19(e)(3)(i). For example, if, in the disclosures provided pursuant to §§ 1026.19(e)(1)(i) and 1026.37(f)(3), a creditor discloses an estimated fee for an unaffiliated settlement agent and permits the consumer to shop for that service, but the consumer either does not choose a provider, or chooses a provider identified by the creditor on the written list provided pursuant to § 1026.19(e)(1)(vi)(C), then the estimated settlement agent fee is included with the fees that may, in aggregate, increase by no more than 10 percent for the purposes of § 1026.19(e)(3)(ii). If, however, the consumer chooses a provider that is not on the written list, then good faith is determined according to § 1026.19(e)(3)(iii).

Okay, Glutes. I follow you on that. Seems like it may not necessarily be an issue to select a settlement service provider for the borrower that is not on the WPL, though it would seem strange to pick another party when you already have the provider you have vetted for the WPL. I could still see an examiner having an issue with it though, but the Reg. comments seem to provide leeway on this. However, there is still the issue of listing a provider that is unable to provide the service in the area where the transaction is taking place.

I'm not following you, Glutes.
How can you quote a fee on the LE and then expect to get to use the 10% if you chose a provider that isn't the one that you quoted?