If the borrower is paying the broker's compensation and the lender pays a credit to the borrower for a TRID tolerance error for a fee that exceeded the amount disclosed on the LE, can the cure be used toward the borrower's payment of the broker's compensation, or would it violate the prohibition on dual compensation?

For example, if the broker's compensation is $2,000, the borrower must pay at least $2,000 at closing so that none of the broker compensation is paid by the lender. But if the borrower is receiving a $500 lender credit for a TRID tolerance error, can the borrower pay $1,500 at closing and use the $500 TRID tolerance cure to pay the rest of the broker's compensation? Or would the TRID cure be considered lender-paid compensation?

Thanks.

I don't understand. If the broker is charging the consumer $2,000 and it is being paid out of the loan proceeds or otherwise, what does a lender cure have to do with it. The consumer does not have to bring in $2,000 to close the loan. They can borrower it from the lender, if the lender allows. The fact that the broker is receiving payment from loan proceeds does not mean they are receiving payment from the lender.

But I don't think TRID tolerance cures are considered “loan proceeds”

Section 1026.36(d)(2)(i) says in comment 2i and 2ii that loan proceeds are considered borrower funds for broker compensation, but that premium pricing is not, and a lender credit applied to reduce a borrower’s settlement charge is not. Based on these, it appears that the term loan proceeds refers to loan principal. But a TRID tolerance cure doesn’t fit any of these. It isn’t part of the loan principal, and it doesn’t reduce a consumer’s settlement charges. It just ensures that the settlement charges don’t increase beyond tolerances.

As a result, I'm not sure if cures can be applied to borrower paid broker compensation.

You are giving a cure to the consumer for a regulatory violation not to the broker. You are not paying the broker, the consumer is. Is the broker fee not part of the closing fees? How is that not either coming from the loan proceeds or the cash the borrower is bring to the table based on the cash to close?

Yes. I agree that it is. And comment 2i says that a lender credit applied to reduce closing fees would not be considered a payment by the borrower. So since it can't be used to pay any of the broker compensation wouldn't we need to make sure the borrower pays the full compensation without using any funds from the cure?

Maybe the only time this would occur is when the cure is for an error in disclosing the broker's compensation. In that situation would the borrower still need to bring enough funds to closing to pay the full amount of the broker's compensation even though the lender would be paying the cure?

While the broker compensation is a settlement fee, I just remembered that the comment I referenced above only applies to credits that REDUCE a settlement fee. But a cure doesn't actually reduce the settlement fee. It just keeps it from increasing beyond what was disclosed. That's where I got hung up. The reg says that if the borrower is paying broker compensation then neither premium pricing credits nor credits that reduce settlement fees can be applied to the broker compensation. But it's silent on lender credits for tolerance errors.

So if the broker compensation to be paid by the borrower is $4,000 and we incorrectly disclosed $2,500, we would need to cure the $1,500 tolerance error. But could the borrower use that $1,500 cure toward the broker compensation so they only need to come up with $2,500, or do they need to bring $4,000 to prevent dual compensation because the $1,500 cure isn't considered to be a payment from the borrower?

The borrower is going to pay that $4,000 as part of the closing. Because you have a tolerance violation, you will pay the borrower in the closing $1,500. It's not a case of the bank paying part of the broker's fee. It's a case of paying a penalty for underestimating the closing costs.

What you definitely do NOT want to do is list the broker's fee as $2,500 from the borrower and $1,500 paid by others (lender) to avoid the tolerance violation. The net cash to/from the borrower would be the same, but you'd both be paying the broker, and that's verboten.

Thanks John!

Larry