Principal Reduction verbiage

What should the verbiage be in Section K Adjustments for Principal Reductions? The scenario is a purchase transaction, we need to avoid giving the borrower $X amount back at closing so we are applying $X as a principal reduction at closing.

Principal Reduction by "Our Bank Name"
OR
Principal Reduction to "Borrower Name"

Our LOS gave an example of both ways, but I'm sure only one of those ways is the correct way

Why not just lower the loan amount and not worry about the principal reduction?

Because they could have a last minute change to closing costs that slightly lowered them, they have a loan program that does not allow cash-back to the borrower and they want to tweak the CD without re-drawing the entire loan package.

In Section K - Lines 05-07 - "$XX.XX Principal Reduction" then the amount in the column also.

We just had this situation recently and underwriting told me that FNMA does not allow principal reductions on purchases. They want the loan amount changed.
And in this day of automated draft documentation, re-drawing the loan package really isn't that big a deal, imho.

I am just answering the question as asked and not questioning the reason for doing it

The commentary 1026.38 4ii Principal reduction paid with closing funds states creditor is to disclose the amount of the principal reduction, the phrase 'principal reduction' or similar phrase and the name of the payee. The example statement verbiage they provided "Principal Reduction to Consumer" and does not specify to list the borrower name as 'payee'.

Follow up question:

If you're doing a principal reduction at the time of closing, do you have to adjust the per diem collected till the first payment to reflect the fact that the interest is being paid on a lower amount than the docs are drafted for?

If not, would you have to go back and cure for this later?

Just thinking out loud here....

I am not aware of any specific guidance. The CFPB does not think that deeply. I am also not sure how you are going to force a typical doc prep system into such an adjustment.