One topic which is near and dear to lenders and appraisers is: When can a lender or broker (“loan originator”) collect funds from an applicant to pay for appraisals and other services that are part of the origination process?
We are so used to looking to FIRREA, the federal regulations and guidance from Fannie Mae and Freddie Mac for guidance on appraisal matters, that sometimes we forget there are other regulations that impinge on the appraisal process.
If you remember, in 2008, HUD issued new regulations which changed the “Good Faith Estimate” (or GFE) process. The loan originator needs to issue a GFE (sometimes called a three-day notice) within three business days after the loan originator has collected “at least the following six items of information: the borrower’s name, Social Security Number, and gross monthly income; the property address; an estimate of the value of the property; and the amount of the mortgage loan sought. The borrower’s Social Security Number would be collected for purposes of obtaining a credit report.”
By providing the applicant with the GFE, the applicant can compare the terms from Lender A against Lender B, C, D or Z to make a decision about which one he or she prefers. To reduce the burden of this shopping process on the applicant there are some rules about what fees a loan originator may charge in the process.
Here is the general rule (to make it interesting, this issue is governed by both RESPA and Truth in Lending—imagine that).
The Federal Reserve Board’s rule restricts creditors from imposing a fee on a consumer in connection with the consumer’s application for a mortgage before the consumer has received the TILA disclosure. The Federal Reserve Board makes an exception that allows imposition of a fee that is bona fide and reasonable in amount for obtaining the consumer’s credit history. In an effort to create consistency among regulatory requirements and serve the best interests of consumers, HUD is similarly limiting the fee for the GFE to the cost of a credit report. Also, as in the proposed rule, a loan originator is expressly not permitted to charge, as a condition of providing a GFE, any fee for an appraisal, inspection, or similar settlement service.
Truth in Lending
§ 226.19 Certain mortgage and variable-rate transactions.
(ii) Imposition of fees. Except as provided in paragraph (a)(1)(iii) of this section, neither a creditor nor any other person may impose a fee on a consumer in connection with the consumer’s application for a mortgage transaction subject to paragraph (a)(1)(i) of this section before the consumer has received the disclosures required by paragraph (a)(1)(i) of this section. If the disclosures are mailed to the consumer, the consumer is considered to have received them three business days after they are mailed.
(iii) Exception to fee restriction. A creditor or other person may impose a fee for obtaining the consumer’s credit history before the consumer has received the disclosures required by paragraph (a)(1)(i) of this section, provided the fee is bona fide and reasonable in amount.
In other words, the lender may not charge anything other than a credit reporting fee as part of the Good Faith Estimate process. This does not prevent a loan originator from ordering or obtaining services (such as appraisals and other third party services); it just means that as a matter of course, originators are taking the risk that they will not be able to seek reimbursement for those services from the potential borrower. The general notion is that the Good Faith Estimate is issued to the applicant so that the applicant can compare various GFEs from various lenders and then decide which lender to use. Once the applicant has made that decision to go forward, then things can move on.
Here is what the RESPA FAQs say:
New RESPA Rule FAQs [Updated September 18, 2009]
10) Q: At what point can a loan originator charge a loan applicant fees for services other than the cost of obtaining a credit report?
A: After a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE, the loan originator may collect fees beyond the cost of a credit report for origination-related services.
In other words, the loan originator may start collecting additional fees, for the appraisal and other services, once the applicant has received the GFE and has indicated that he or she is interested in proceeding with that loan originator.
And for the appraisal community, that is one of the reasons by a loan originator may delay the ordering of an appraisal until the originator is well into the process. But, it also means there is good reason to believe there are funds available to pay the appraiser’s fees.
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