The Lock Extension, the 0.129% APR, and the Manager's Re-Pricing Suggestion
Kwame submits a complete application on Monday, March 3, for a $280,000 rate-and-term refinance of his primary residence, supplying every element that makes the submission an application. The lender locks 6.375% at a 6.512% APR for 45 days, expiring April 17. The Loan Estimate issued March 5 discloses the 6.512% APR.
The subordination agreement from his second-lien holder takes three weeks longer than expected; the delay is entirely on the second-lien servicer. The lock expires, and the lender charges a 0.25% lock extension fee ($700). Closing is set for Monday, May 5.
The Closing Disclosure delivered Monday, April 28 shows the 6.512% APR and no extension fee. On Thursday, May 1, the lender adds the $700 to the CD, pushing the APR to 6.641%. Separately, the branch manager suggests re-pricing at 6.625%, using the extra yield-spread premium to absorb the $700 so the borrower "never sees the fee," and re-labeling it a "third-party subordination fee."
1. Can the $700 lock extension fee be passed to Kwame? What disclosure steps must precede charging it?
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A rate-lock extension fee is a fee paid to the creditor, so it falls in the zero-tolerance bucket. It may be passed to the borrower only when a valid changed circumstance supports it.
Changed circumstance analysis: the delay came from the second-lien servicer's processing of a subordination agreement - an event outside the creditor's control, not caused by the borrower, and not anticipated at application. That is defensible, so the fee can be passed if the creditor documents the date it learned of the delay and issues a revised Loan Estimate within three business days of that date. The revised LE also must go out no later than four business days before consummation and can never be delivered on or after the Closing Disclosure.
Here the creditor did the opposite: the April 28 CD omitted the fee, and the $700 appeared only on a May 1 revision. That is a zero-tolerance violation with no valid reset - the creditor absorbs the $700 (or cures it with a refund plus a corrected CD within 60 days).
The lock itself is a separate consumer-facing issue: the borrower should have received a written lock confirmation with the rate, points, lock period, and the extension policy.
2. The APR moves from 6.512% to 6.641%. Is a new three-business-day waiting period required, and can closing still occur on Monday, May 5?
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Threshold test: a revised CD with a new three-business-day review is required when the APR becomes inaccurate such that it exceeds the last disclosed APR by more than 1/8 of 1 percentage point (0.125%).
6.641% - 6.512% = 0.129%, which is more than 0.125%, so the new waiting period is triggered.
Timing: the corrected CD was received Thursday, May 1. Count business days (all calendar days except Sundays and federal holidays):
- Friday, May 2 = day 1
- Saturday, May 3 = day 2 (Saturdays count)
- Sunday, May 4 = excluded
- Monday, May 5 = consummation, not counted
Only two business days elapse before a Monday closing, so a May 5 consummation is not permitted. The earliest permissible consummation is Tuesday, May 6 (Friday, Saturday, Monday = three business days).
The practical takeaway: the clock starts on receipt, and pushing a Thursday corrected CD to a Monday close is one day short every time.
3. Evaluate the manager's two suggestions: re-pricing to 6.625% and using yield-spread premium to absorb the fee, and re-labeling the $700 as a third-party subordination fee.
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Re-pricing to absorb the fee: a loan originator's compensation may not be based on the transaction's terms or conditions - not the interest rate, not the points, not the fees. A compensation plan that pays the LO more when the rate is raised is a per-se violation of the loan originator compensation rule, and using increased yield-spread premium to make the borrower "never see" the $700 does not cure anything: the borrower still pays it, just invisibly, through a higher rate over the loan's life. If the lender absorbs the fee, it must do so as a lender credit disclosed on the CD, not by silently marking up the rate.
Re-labeling: the $700 is a creditor fee. Calling it a third-party subordination fee on the CD is a factual misstatement of who was paid and for what, on a federally prescribed form. If the subordination servicer actually charged a separate fee, that fee would be disclosed in its own right, with its own tolerance treatment, and supported by an invoice. Creating a label to shift a creditor fee into a third-party bucket is a misrepresentation that exposes the LO and the lender to administrative action and the borrower to a claim.
What to do: decline both suggestions, escalate to compliance in writing, and let the creditor decide whether to absorb the $700. Compensation-driven steering of a borrower into a higher rate is also a fairness problem independent of the disclosure rules.