The TILA-RESPA Integrated Disclosure (TRID) rule was designed to make consumer disclosures for mortgage loans easier for customers to understand and to prevent those customers from being surprised at closing by the fees charged. Banks are required to exercise good faith when issuing the required disclosures. Good faith means ensuring the bank understands the transaction and includes all closing costs that will normally be required to be paid. Closing cost tolerances are limited and can be as low as 0% or may have no specific tolerance limitation, depending on the type of fee. When the Loan Estimate is issued, those tolerance amounts generally establish the baseline for determining good faith unless Regulation Z permits the creditor to use a revised estimate. Understanding when estimates may be revised — and what a revision permits — is essential for compliance with the regulations.

TRID identifies six circumstances in which a creditor may be permitted to use revised estimates for purposes of determining good faith: (1) a changed circumstance affecting settlement charges, such as an extraordinary event or inaccurate, new, or changed information relied upon in providing the Loan Estimate; (2) a changed circumstance affecting the consumer’s eligibility for the loan or the value of the property securing the loan; (3) revisions requested by the consumer; (4) changes in interest-rate-dependent charges when the interest rate is locked after the initial Loan Estimate; (5) the consumer indicates an intent to proceed after the Loan Estimate has expired; and (6) certain delayed settlements involving new-construction loans. A permissible circumstance must affect the particular estimated charge or charges being revised; the creditor may not use the event to reset unrelated charges.

TRID limits how much certain closing costs may increase between the Loan Estimate and the Closing Disclosure. Charges paid to the creditor, mortgage broker or an affiliate, as well as charges for required services for which the consumer cannot shop, are generally subject to a 0% tolerance. Recording fees and charges for required third-party services for which the consumer is permitted to shop and selects a provider from the creditor’s written list are generally subject to a 10% cumulative tolerance. Certain other charges, such as services not required by the creditor and services for which the consumer selects a provider outside the creditor’s written list, may change without a specific tolerance limit. The applicable baseline estimates may be reset only when one of the circumstances permitted by Regulation Z occurs, and the requirements for using revised estimates are satisfied.

However, this does not mean that every permissible circumstance gives the lender permission to reset every closing cost. The change in closing costs must be tied to the actual event that caused it and must be documented by the bank. The bank should document the original estimate of the charge, the reason for the revision, how the event affected the charge and that the revised estimate increased only to the extent the permissible reason actually increased the charge. The bank should also document the date it received sufficient information to establish the reason for the revision so that it can demonstrate compliance with the applicable three-business-day timing requirement. Depending on the timing of the change relative to the consummation and delivery of the Closing Disclosure, the revised estimate may need to be reflected on the Closing Disclosure or on an appropriately corrected Closing Disclosure, rather than on a revised Loan Estimate. A revised Loan Estimate may not be provided on or after the date the Closing Disclosure is provided.

One other notable item: If a fee is now known, the creditor should use the best information reasonably available when preparing the revised disclosure. For example, if the appraisal has been completed and the actual charge is known, that information should be taken into account when preparing the revised disclosure. Let’s look at some examples.

1. Increase in loan amount. The borrower requests an increase in the loan amount for a refinance transaction. The loan amount determines the lender’s title policy premium. If the lender’s title policy falls within the 10% cumulative tolerance category, the creditor could rely on a revised estimate if the consumer-requested change causes the aggregate charges subject to the 10% tolerance to exceed the permitted limit. The 10% test applies to the cumulative total of charges in that tolerance category, rather than to whether an individual title charge increased by more than 10%.
2. Change in loan eligibility. During underwriting, verified income is lower than originally anticipated, necessitating a change from a secondary-market mortgage loan to an in-house mortgage loan. As a result of the change in eligibility and the loan program, the origination fee has increased. A revised disclosure may be used to reflect the resulting increase in the origination fee, provided the requirements for using revised estimates are satisfied.
3. Consumer-requested inspection. The borrower requests an HVAC inspection for the home being purchased. An additional fee will need to be collected, but the inspection is not required by the bank. Because a service that is not required by the creditor is generally not subject to a specific tolerance limitation, a revised Loan Estimate is not necessary merely to reset the tolerance for this charge.
4. Additional appraisal charge. The appraisal indicates that repairs must be completed, and the appraiser will need to return to verify them. The return visit results in an additional appraisal charge. Assuming the appraisal charge is subject to the 0% tolerance category, the creditor would need to timely disclose and rely on a revised estimate if it wishes to reset the applicable estimate for tolerance purposes.

For new-construction loans, Regulation Z also provides a specific circumstance under which revised estimates may be used when settlement is reasonably expected to occur more than 60 days after the Loan Estimate is provided. To rely on this provision, the original Loan Estimate must contain the required clear and conspicuous statement that the creditor may issue revised disclosures at any time prior to 60 days before consummation.

It all comes down to what closing costs are changing and why. A creditor is not required to issue a revised Loan Estimate merely because a fee changes if the change does not affect the creditor’s ability to comply with the applicable good-faith and tolerance requirements. Some banks prefer to provide revised Loan Estimates more frequently to keep borrowers informed, but doing so can complicate tolerance auditing. A revised Loan Estimate also cannot be provided on or after the date the Closing Disclosure is provided, so changes occurring later in the transaction may need to be reflected on a Closing Disclosure or an appropriately corrected Closing Disclosure.

When a creditor needs to rely on a revised estimate for tolerance purposes, timing is critical. The creditor generally must provide the revised disclosure within three business days after receiving information sufficient to establish that a permissible reason for revision has occurred. In addition, when a revised Loan Estimate is used, the consumer generally must receive it no later than four business days before consummation. If the creditor fails to provide the revised disclosure within the required period, it generally cannot rely on that revised amount when determining whether the original estimate was made in good faith. The charge may therefore have to be tested against the previously applicable estimate, potentially resulting in a tolerance violation and a required cure.

The key is to remember that a changed circumstance or other permissible event does not provide a blanket opportunity to reset closing costs. The bank should be able to identify the event, establish when it learned of it, demonstrate how it affected the particular charge being revised, and show that the revised disclosure was provided within the required timeframe. Good documentation and a clear connection between the event and the revised charge are essential to demonstrating TRID compliance.