Affiliated Fees to Included in 3% or not?; "Funding" Versus "Closing" - Pick One!

In August 2015 there will be a change to the mandatory waiting period (“effective August 2015 a home BUYER will now have a MANDATORY 3 day waiting period before the loan can fund, like a refinance now”). Those “in the know” say that the new regulation does not address loan funding, only loan closing. The 3 day requirement is prior to closing.  A purchase can close and fund the same day.  And the new rule did not make any modifications to the rescission requirements.

But things are not that easy. Some use the term “when your loan closes” and others use “when your loan funds.” The first problem is that there is no definition of “closing date” in RESPA/TILA. Therefore are companies are forced to define the closing date for themselves. In the East, it is often assume that the note date is the closing date because the note date is when all the parties come together to sign and close the transaction – called a table closing. In Western states, closing is done via an escrow process and all the parties do not come together and instead the two parties visit the escrow agent for signing. The escrow agent does not “close” the loan by recording it until three things have happened: all parties signed, all money is in, and all escrow instructions have been met. A borrower could sign on a Tuesday, but not fund & record, and therefore close, until Friday. Even the agencies don’t “get this” and even they sometimes use note date and closing date interchangeably.

I received this stab at things from an escrow officer west of the Mississippi: “Those terms are not necessarily universal. On the east coast the ‘closing’ is when everyone sits down to sign, and often times the lender funds the loan at that time. In California, for example, ‘closing’ means the transfer of ownership (i.e. recording the grant deed at the county). The funding of the loan is when the lender releases the loan funds to the closing agent and authorizes the disbursement of those funds. We usually request loan funding the day prior to closing. However, often times funding can occur in the morning and we are able to close the same day in the afternoon. It all depends on timing since we have to comply with specific recording times at the county.”

And Andrew Liput, president of Secure Settlements, writes, “Sounds like they want three days with a final HUD-1 to avoid last minute term and price changes. The definition of a ‘closing’ depends upon your perspective.  The funding date is the date that the money leaves the lender or their warehouse bank and is wired to the settlement agent.  This starts the clock ticking on interest and other costs of funds.  For a lender that is the key date.  From a legal perspective, the transfer of property takes place when consideration is exchanged for the property transfer instrument (deed).  Recording is not necessary to effectuate the transfer…once you have the original deed and consideration has passed (funds are transferred to the seller or their agent), then the transaction is ‘closed.’ Recording puts the world on notice of the transfer and amends the title, but the deed date establishes the date of ownership.  In this regard I see no real difference between East and West Coast transactions, except that the settlement or escrow agent may take longer to disburse funds.  In both instances the document dates control the legal definition of when the property transferred (i.e. the closing). In my opinion the CFPB is considering the closing date to be the document date…the date of the deed and the note reflect the date of the transaction. I think it is more likely that this will play out that there will be a three day PAUSE between final documents and the closing date…essentially freezing the rate and other terms as set forth in the disclosures and the HUD-1.  Once that period passes the parties can proceed to the table for the closing, regardless of whether it is wet or dry.   Here is the problem….what happens if a buyer chooses to exercise the right to rescind? It will create chaos for sellers and a whole lot of litigation by attorneys regarding the motive for a seller to back out of the financing.

Supposedly in the recent comment period for RESPA/TILA modification, I have heard that various lenders have requested clarity on the closing versus funding event issue from the CFPB. I hope so – it would be nice to have the same definition for the same event across the nation.

There continues to be some measure of uncertainty in the residential lending industry about affiliated relationships, and how they factor into the points and fees test. Not helping the confusion have been some verbal comments which vary somewhat from the written comments, or those put forth in various presentations, regarding the affiliate provision of the points and fees test (as a refresher, page 37). It is my understanding after doing a little research, and a discussion with Paul Mondor, Managing Counsel in the Office of Regulations at the Consumer Financial Protection Bureau, that just the portion of the fees that is paid to the affiliate and kept by the affiliate is counted in the 3% points and fees calculation. Often times a title company and a lender/creditor, or an appraisal management company and a lender, are in "affiliated" relationships, with shared ownership. The title agent, for example, may receive money at closing but then pass on a portion of that money to other entities – those portions that are passed on are not included. The portion that is counted in the points and fees threshold is the amount paid to the affiliate and kept by the affiliate.

So the only part of the charges from an Affiliate that are included in the points and fees calculation is that portion of the charges that are retained by the Affiliate. In the regulations, title services are excluded from the finance charge, for example. But then, in the “3rd step” in determining what is included in the points and fees calculation, items that were previously excluded are brought back in unless the charge is "reasonable,” the creditor receives no portion of it, and the money is not paid to an affiliate of the creditor. At that point, the money that is paid for title services to an affiliate may be included in the calculation– but the question then turns to how much of the payment? As an example that I used in Saturday's commentary, a reader wrote, "For example, an Insurance Agency is an Affiliate of a creditor and the charge on the HUD is to that insurance Agency for $1,000 for the Homeowner's Policy. The Agency passes through $900 to the Insurance Company, e.g. AETNA, and retains $100 as their brokerage fee.  Only the portion retained by the affiliate, i.e. $100, is included in Points and Fees. Accordingly, if the Affiliate is a Title Company, and the affiliate retains the Escrow and Notary Fees those fees are included in Points and Fees.  And when it comes to Title Insurance premiums, again only that portion of a premium retained by a Title Company as commission, for example, is included in the Points and Fees, not the portion passed through to the Insuring Company for the Title Insurance coverage.

If you have questions, they are easy to submit to the CFPB through its industry-dedicated interpretive guidance email address: CFPB_RegInquiries@cfpb.gov. Also, the CFPB has put a lot of industry-focused compliance resources here. Seek and ye shall find. And if ye can't find it, shoot them an e-mail!

Yesterday the commentary discussed the use of gift funds for various programs. Dean Dardzinski, Pacific Northwest Sales Manager for MGIC writes, “In regards to your comment about agency loans and the ability of a borrower to receive a gift for the down payment and closing costs, this was something FNMA began allowing nearly three years ago when they released DU version 8.4.  MGIC allows the use of gift funds in the transaction when you receive a DU Approve/Eligible, no overlays or additional requirements; just follow your findings and the Agency's donor requirements.  For those loan officers and companies who have been aware of this guideline, they've been able to increase their borrower's purchase power by upwards of 10%.  As loan officers search for topics to discuss with Realtors, I'm sure they would get a lot of attention with this one.  Contact your local MGIC account manager to learn more.”

And Rob Arnaud with HomeBridge writes, “I just wanted to let you know that HomeBridge now is offering 5% down Conventional with all gift funds.”

Turning to the markets, and the fixed-income markets (which include bonds like mortgage-backed securities), the National Association of Realtors confirmed something real estate agents have known about: although conditions were mixed across the country, pending home sales continued to move lower in October, marking the fifth consecutive monthly decline. The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 0.6 percent to 102.1 in October from an upwardly revised 102.7 in September, and is 1.6 percent below October 2012 when it was 103.8. The index is at the lowest level since December 2012 when it was 101.3; the data reflect contracts but not closings. The reasons were the government shutdown (waiting for IRS income verification for mortgage approval), limited inventory, and falling affordability conditions.

But the markets stayed in a tight range Monday – who needs the volatility heading into the holiday? And the financial press doesn’t seem to have much talk about, although today the Housing Starts & Building Permits duo is due out, and Consumer Confidence will be released. The results from the 5-yr Treasury auction will come out around 1PM EST. So far rates aren’t doing much: the risk-free US T-note closed Monday at a yield of 2.74% and this morning it is…2.73%.

Who doesn’t enjoy a good lawyer joke? You may have even read one or two in this commentary. A good friend of mine, who happens to be an attorney, likes to say, “That joke would be slanderous…..if it wasn’t true.” So when, a few months back, I came across a Bloomberg article regarding the attorney fees banks have racked over the past few years, I had to forward it along to him. He replied back with a “cease and desist” letter, God bless him. Of the six largest banks, JPMorgan Chase and Bank of America have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years. According to the article, around 40% of the legal and litigation outlays arose since January 2012, and banks are warning the totals may surge as regulators, prosecutors and investors press new claims. They write, “The prospect is clouding outlooks for stock prices, and by some estimates the damage could last another decade. JPMorgan and Bank of America bore about 75 percent of the total costs, according to the figures compiled from company reports.” JPMorgan devoted $21.3 billion to legal fees and litigation since the start of 2008, more than any other lender, and added $8.1 billion to reserves for mortgage buybacks – and this doesn’t even include the last several months.