The Tied Rate Discount and the Reissued Loan Estimate
On Monday, March 3, Priya, an originator at a federally registered mortgage banker in Buffalo, takes a purchase application for an FHA loan of $318,000 on a $330,000 house. With the application she hands the borrowers a Loan Estimate and a brochure for the lender's affiliated title agency, telling them that using the affiliate 'protects the 0.250% rate discount' and that files sent to outside title companies 'tend to sit for a week.' On March 18, after the borrowers' employer confirms a raise that starts in June, she reissues the Loan Estimate: the origination fee is $620 higher, the recording fee $120 higher, and the appraisal fee $95 higher. Nothing about the property, the borrowers' credit, or the loan terms has changed, and no new provider was substituted. The loan closes April 24. The final Closing Disclosure shows total closing costs of $7,940, against $7,260 on the original Loan Estimate. Priya's file notes only say, 're-disclosed for updated info.'
1. Is the arrangement with the affiliated title agency permissible? What would have to be true for it to be lawful, and what is the exposure if it is not?
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Section 8(a) of RESPA bars giving or receiving anything of value in exchange for referrals of settlement service business. There is a narrow safe harbor for affiliated business arrangements in 12 CFR 1024.15, and it requires all of the following: a written disclosure of the affiliation given to the consumer at or before the referral; a statement that the consumer is not required to use the affiliate; and the only thing of value received by the affiliate being a bona fide return on ownership.
Here two elements fail. Tying a 0.250% rate discount to use of the affiliate converts the discount into an inducement for the referral, and telling the borrowers that outside title companies will slow the file is effectively required use. The result is a Section 8 violation, not a technical disclosure gap. Exposure includes treble damages and civil money penalties for the lender, individual liability for originators who participate, potential rescission-type settlement costs, and state conduct scrutiny. The correct practice: disclose the affiliation in writing, price the loan identically no matter who provides title, and be able to show the borrowers were free to shop.
2. Was the March 18 revised Loan Estimate valid? State the timing rules for the initial disclosure, the revised disclosure, and delivery before consummation.
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No. The original Loan Estimate had to be delivered or placed in the mail no later than three business days after the application (a business day here being a day the creditor's offices are open for substantially all business). A revised Loan Estimate may only reset tolerances when a valid changed circumstance exists, and it must be delivered or mailed within three business days of the creditor receiving information sufficient to establish that circumstance, and received by the consumer no later than four business days before consummation.
A valid changed circumstance is an extraordinary event, information the creditor relied on that turns out to be inaccurate, or new information specific to the transaction. A scheduled raise is none of these, and it does not explain the origination or recording fee anyway. Because the reissued estimate did not rest on a valid changed circumstance, it cannot be used to reset the baseline; the original Loan Estimate remains the benchmark for good-faith and tolerance testing. Priya should have kept the original figures and corrected only fees genuinely affected by a qualifying event, with the reason documented in the file.
3. Apply the tolerance categories to the three fees that increased and describe exactly what the lender must do now.
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Sort the fees first. The origination fee is paid to the creditor, so it sits in the zero-tolerance category: any increase over the amount disclosed is a violation, with no de minimis allowance and no need to look at percentages. The $620 increase must be refunded to the borrowers, whether or not they noticed it.
The recording fee and the appraisal fee are normally in the 10% cumulative bucket, along with other third-party and recording charges, provided the consumers were permitted to shop and either chose from the written list or the creditor selected the provider. Add all charges in that bucket from the original Loan Estimate, take 10% of the total, and compare with the actual amounts. If the actual aggregate exceeds the disclosed total by more than 10%, the difference above the threshold must be refunded.
Cure mechanics: refund within 60 days of consummation, issue a corrected Closing Disclosure reflecting the refund, and document the analysis. Retain the Loan Estimates, Closing Disclosure, and cure calculation for at least three years. Also self-report to compliance, since a pattern of unsupported re-disclosures suggests a systemic problem rather than one bad file.