Disclosing Seller Closing Costs to Buyer

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Question:

A seller is paying closing costs to the buyer. Do these closing costs need to be identified since some are APR fees and others are not? Can the lender issue a credit toward a portion of discount fees on the HUD1? Since origination and discount fees are APR fees, does the APR need to be reduced by the amount of the credit? Can the APR be over-stated by more than .125 since this is the borrower's benefit?

Answer:

Closing costs the seller has agreed to pay to the buyer must not be reflected in the TIL disclosures in any way.

In the more typical case where the seller and buyer have reached a side agreement whereby the seller agrees to pay certain closing costs to the lender on the buyer's behalf, the answer could be different--but only if the lender is a party to this side agreement.

All of Regulation Z's calculations and disclosures are driven by the fundamental principle, found in Section 1026.17(c)(1), that "the disclosures shall reflect the terms of the legal obligation between the parties." The legal obligation will include any and all binding agreements between these parties--such as the commitment letter. Normally, the commitment letter will set forth the loan's fee structure, and unless it waives or modifies certain fees, the relationship begins with the borrower being fully responsible for payment of the fees stated in the commitment letter. At this moment, the lender may be aware of the side agreement, but may not be a party to it. Unless the lender enters into the side agreement and thereby releases the borrower from the obligation to pay specified fees, all TIL disclosures must include the fees as if the side agreement did not exist.

The Official Interpretations of Section 1026.17(c)(1) do not discuss the exact case under consideration, but they do address the analogous case of third-party buydowns. No matter whether the third-party (seller, in this case) is buying down the fees or interest rate, the effect on the calculations and disclosures is the same.

First published on BankersOnline.com 6/17/13