In a purchase loan the borrower shopped for title services, the bank disclosed the CD as the borrower and seller splitting customary fees, however there was a contract in file (no one noticed apparently) stating the seller would not pay any fees, period. A new settlement statement was provided with the borrower paying for everything. In this case, even though they shopped would we still have to cover the fees the borrower has to pay for?

Sounds like it, as your initial LE was not in good faith if you had the contract in hand when you issued it.

Would that apply for items we didn't require (such as the Owner's Title Insurance), but the borrower paid it at closing?

An Owner's title policy I believe would still fall under this:

3. Good faith requirement for property taxes or non-required services chosen by the consumer. Differences between the amounts of estimated charges for property taxes or services not required by the creditor disclosed under § 1026.19(e)(1)(i) and the amounts of such charges paid by or imposed on the consumer do not constitute a lack of good faith, so long as the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. For example, if the consumer informs the creditor that the consumer will obtain a type of inspection not required by the creditor, the creditor must include the charge for that item in the disclosures provided under § 1026.19(e)(1)(i), but the actual amount of the inspection fee need not be compared to the original estimate for the inspection fee to perform the good faith analysis required by § 1026.19(e)(3)(iii). The original estimated charge, or lack of an estimated charge for a particular service, complies with § 1026.19(e)(3)(iii) if it is made based on the best information reasonably available to the creditor at the time that the estimate was provided. But, for example, if the subject property is located in a jurisdiction where consumers are customarily represented at closing by their own attorney, even though it is not a requirement, and the creditor fails to include a fee for the consumer's attorney, or includes an unreasonably low estimate for such fee, on the original estimates provided under § 1026.19(e)(1)(i), then the creditor's failure to disclose, or unreasonably low estimation, does not comply with § 1026.19(e)(3)(iii). Similarly, the amount disclosed for property taxes must be based on the best information reasonably available to the creditor at the time the disclosure was provided. For example, if the creditor fails to include a charge for property taxes, or includes an unreasonably low estimate for that charge, on the original estimates provided under § 1026.19(e)(1)(i), then the creditor's failure to disclose, or unreasonably low estimation, does not comply with § 1026.19(e)(3)(iii) and the charge for property tax would be subject to the good faith determination under § 1026.19(e)(3)(i).

I would say the terms of the purchase contract are between the buyer and the seller, the bank is not a party to that contract.

So if you initially disclosed the title charges on your LE as you typically would for any other transaction and then the borrower shopped and used a different provider than was on your identified list, all the title fees move to the unlimited change category. If your CD shows the borrower then paying all of the title work costs I don't see a tolerance issue.

I do not agree. That might be true if the charges the bank disclosed were not half of what the contract said they were going to be for the buyer. If you have the sales contract - you need to read it and determine the impact on closing costs it may have on the loan. Otherwise, what you gave the applicant is not in good faith.

Comment 17(c)(1)-1 also specifies that the legal obligation between the creditor and consumer is determined by applicable State law or other law. Sales contracts, government program guidelines, or other requirements may be the basis for the legal obligation between the creditor and consumer. A creditor must retain evidence of compliance with the requirements of § 1026.19(e), including § 1026.19(e)(3)(iv), consistent with the record retention requirements in § 1026.25(c)(1)(i).

I agree with Randy. If you fail to disclose fees (on the LE) or fail to account for a changed circumstance (receipt of the sales contract). Any fees you fail to disclose (i.e. lack of good faith) or account/adjust for will be subject to a tolerance (0% or 10% depending on the circumstance). This includes unlimited tolerance items.

Thank you for your help, gents!