The New Integrated Mortgage Disclosure Rules

This week’s discussion focuses on the technical aspects of variances in the new IMD rules.

Dear Fund Member:

Over the past several months, I have raised several non-technical implications of the new Integrated Mortgage Disclosure rules (IMD). These comments focused primarily on how you will have to “do business differently” in your offices and with lenders, realtors, vendors, buyers and sellers. This week, I want to bring your focus back to one of the technical aspects of the new rules: Variances.

Some background: In 2010, lenders found themselves answerable for the good faith estimates they had been providing for decades. Reimbursement was required if certain final charges exceeded lenders’ estimates for those services. A standard form was introduced that included eleven types of settlement services for which estimates had to be provided. The final charges for some services could increase up to ten percent in the aggregate above the estimates and not trigger a reimbursement requirement. This category was said to have a ten percent tolerance threshold, and the term “tolerances” was adopted by the industry. A “zero tolerance” category covered estimates that could not increase at all while a third and final category covered estimated services for which the final charges were “free to vary.”

The IMD rules effective August 1st renew this structure, but with several important changes. The least important is that the rules speak to how much an estimate may “vary” before a tolerance threshold is exceeded; hence, you will read and hear the term “variations” instead of, or in addition to, “tolerances” when these rules are applied.

A more significant change is that the new Loan Estimate must include estimates for every service a lender anticipates might find its way on the Closing Disclosure as a charge to the borrower, even if it’s not required as a condition of obtaining the loan. For example, home inspections, home warranties, association dues, and even a borrower’s attorneys’ fees must be estimated, if the originator knows a borrower will likely incur those costs. As these types of services are generally not required by lenders and thus will not be subject to the three familiar tolerance buckets, a lender could still be in trouble if the estimate is not based upon the “best information available” standard as described in the new rules.

Of even greater importance to lenders is the significant increase in the category of services that will be subject to a “zero variation” analysis. These include current “ten percent” category items such as required third party services a borrower may not “shop for” as well as required services provided by affiliates of lenders even when selected by a borrower.

Finally, there is one other significant change which bears more directly on settlement agents. The Closing Disclosure does not contain anything similar to the comparison table found on page three of the current HUD-1. It does have a single line item comparing the total of all estimates with the total of all final charges, but it will be impossible to determine from the Closing Disclosure alone if any impermissible variations exist. The “variations analysis” will take place behind the scenes and, if a reimbursement is dictated, a lender must disclose the violation as a comment on the form. If the lender chooses to make the reimbursement at settlement, a credit will also appear on the form.

You can see from this information why it is important that you begin learning about the new concepts in the IMD rules and/or the ways in which the new rules tweak or change existing practices. I predict that you will be asked to explain where any impermissible variances are shown on the Closing Disclosure and how the lender intends to address this issue.

There are a lot of changes happening in our industry. Here at The Fund, we are dedicated to staying at the forefront of all these changes and ensuring that you, our Members, are provided with the necessary trainings, education and resources:

• The Fund Readiness Page - www.thefund.com/readiness
• The General Counsel Blog - www.thefund.com/GeneralCounselblog
• Fund Assembly - www.thefund.com/assembly
• Affiliate Assembly - www.thefund.com/affiliateassembly

As always, thank you for your support of The Fund!

Best Regards,

Melissa Jay Murphy
Senior Vice President
and General Counsel