The Prepaid Fee Before the Loan Estimate
On a Monday, originator Luis takes an application for a $280,000 purchase loan. The borrower, Ana, is eager and asks to 'get things moving.' Luis's company policy allows collecting a $500 application fee and a $450 appraisal fee up front. Luis collects both fees that same day - before any Loan Estimate has been delivered - and orders the appraisal. He then emails the Loan Estimate two days later. The LE shows the $500 application fee in the 0% tolerance category and the $450 appraisal fee in the 10% category. Ana later complains that she was charged before receiving any disclosure. Luis's manager says 'we always collect up front; it's fine.'
1. Was Luis permitted to collect these fees before delivering the Loan Estimate? Explain the rule.
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Under Regulation Z (12 CFR 1026.19(e)(2)(i)), a creditor or loan originator may not impose any fee - including application, appraisal, or credit report fees - before the consumer has received the Loan Estimate, with a narrow exception: the creditor may permit the consumer to pay a bona fide and reasonable fee for a credit report before the LE. That exception does not cover application or appraisal fees.
So collecting the $500 application fee and $450 appraisal fee before the LE was delivered violates 1026.19(e)(2)(i). The manager's 'we always do it' is not a defense - it is a systemic violation.
Correct practice: deliver the LE (or place it in the mail) first; only then may fees be collected, and the fees must be reflected on the LE.
2. Ana received the LE two days after the fees were collected. What timing rule applies to the LE, and does the two-day delay matter?
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The Loan Estimate must be delivered or placed in the mail no later than 3 business days after receipt of the application (12 CFR 1026.19(e)(1)(iii)). An 'application' for these purposes requires six pieces of information: consumer name, income, SSN, property address, estimated value, and loan amount.
If Luis had all six items Monday, the LE was due by Thursday (3 business days). Delivering it two days later (Wednesday) is within the 3-business-day window - so the timing of the LE itself is compliant.
However, the delay does not cure the earlier violation: the fees were collected before the LE existed, which is a separate and more serious violation. The two-day gap also means Ana paid $950 with no disclosure in hand - a UDAAP concern independent of the 3-day rule.
3. What are the tolerance and cure implications of the fee placement on the LE, and what should the company do now?
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Tolerance categories:
- $500 application fee - a fee paid to the creditor is a 0% tolerance item. It cannot increase at consummation.
- $450 appraisal fee - a third-party service the consumer can shop for is generally 10% cumulative tolerance; if the consumer cannot shop, it is 0%.
Because the fees were collected before the LE, the amounts on the LE must match what was actually charged. If the LE understated or misclassified either fee, a tolerance violation exists and a cure (refund plus corrected disclosure) is required within 60 days of consummation under 1026.19(f)(2)(v).
Recommended actions:
- Refund or credit the improperly collected fees if any cure is owed.
- Reissue a corrected LE and document the sequence.
- Stop the 'collect up front' practice company-wide; retrain staff on 1026.19(e)(2)(i).
- Self-report to compliance; this pattern likely affects many files and creates exam and enforcement exposure.