Overestimating lender credits

Happy Monday, compliance family! Let’s make it a great week by starting off with a compliance blog about giving away money… more specifically, lender credits.

Many credit unions offer lender credits to reduce the closing costs of mortgage loans which makes it easier for members to purchase homes. Good job, credit unions! For some background about lender credits, see our previous blog on the topic.

Sometimes credit unions disclose that lender credits will cover a specific amount of closing costs, but the closing costs end up being less than estimated. In these situations, the credit union still owes the originally estimated amount of lender credits. How can this be? Why should the credit union owe the member money after trying to make the loan more affordable for the member? Regulation Z explains how this situation fits in with the good faith determination.

The amount of a lender credit may not decrease from the amount listed on the loan estimate. Section 1026.19(e)(3)(i) regarding the good faith determination indicates a reduction of lender credits is treated as an increase in closing cost to the member unless the charges are interest rate dependent. Even if the lender credits would exceed the amount of the closing cost, the regulation treats a reduction of the lender credits as a violation of good faith. This appears to be the rule whether the credits were general credits or specific to certain line items. The Commentary to section 1026.19(e)(3) explains this point, “…the actual total amount of lender credits, whether specific or non-specific, provided by the creditor that is less than the estimated “lender credits”[…] is an increased charge to the consumer for purposes of determining good faith under §1026.19(e)(3)(i).”

 

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