We are issuing a post-closing refund (principal reduction) because an invoice came back lower than was disclosed on the CD. The fee was in the 10% bucket and did not cause us to exceed the tolerance. Since the tolerance was not exceeded, we do not need the legal limit error statement in Cash to Close, correct?

A lower fee would not trigger a tolerance cure and the principal reduction would not impact a lender credit, so I am not sure why the question? Can you explain?

We over-charged the borrower for the title service. We need to issue a refund and a revised CD.

Your title services would be then disclosed as a lower amount and your principal reduction of the same amount would be disclosed as follows. There will not be an additional lender credit.

ii. Principal reduction paid with closing funds. A principal reduction is disclosed in the summaries of transactions table under § 1026.38(j)(1)(v) or in the payoffs and payments table under § 1026.38(t)(5)(vii)(B) without the phrase “Paid Outside of Closing” or the abbreviation “P.O.C.” if it is paid from closing funds. The amount of a principal reduction that is paid with closing funds is included in the applicable calculations required under § 1026.38. For example, in a refinance transaction using the alternative tables on the Closing Disclosure, a creditor discloses a $1,000 principal reduction to reduce the cash provided to the consumer by providing in the payoffs and payments table under § 1026.38(t)(5)(vii)(B) a statement such as “Principal Reduction to Consumer” under the column heading “TO” and “$1,000.00” under the column heading “AMOUNT,” and by including such amount in the total payoffs and payments amount under § 1026.38(t)(5)(vii)(B) and in the cash to close amount under § 1026.38(e)(5)(ii). In this example, the creditor must disclose the following elements under § 1026.38(t)(5)(vii)(B): The amount of the principal reduction, the phrase “principal reduction” or a similar phrase, and the name of the payee. The creditor should not include in the disclosure the phrase “Paid Outside of Closing” or “P.O.C.” and the name of the party making the payment, or a statement that the principal reduction is being provided to offset charges that exceed the legal limits, because those principal reduction disclosure elements are not applicable to the transaction in this particular example. The creditor may not use an addendum for the principal reduction disclosure in this example.

Thanks, Randy. I don't think I'm using this properly. Under what circumstances would we issue a principal reduction credit instead of a general lender credit?

If your loan program would not allow cash back to the customer and forces you to do a principal reduction instead of a refund. Otherwise, you issue the customer a revised CD with the lower title service cost disclosed, which will lower the original cash to close that was disclosed and issue them a check for the difference. Either why, there is no lender credit involved.

The closing costs were financed, so if I adjust the title fee the loan amount changes.

Your loan amount will not change - they already signed a note for that amount. How does changing a closing cost change the loan amount? You owe the customer a refund. That is either via a check or giving them a principal reduction as described above.

This is likely our LOS. Thank you, Randy, for going into such detail!