When it comes to consumer shopping for third party settlement service providers, the TILA-RESPA Integrated Disclosure (TRID) rule contains several compliance requirements. These requirements include specific disclosures and impact the fee tolerance thresholds. This article addresses some common questions regarding the service provider shopping provisions.
What does it mean to “shop” for a service?
Page two of the loan estimate contains disclosures regarding the closing cost details of the transaction. Under Loan Costs, sections B and C disclose those services that consumer may and may not shop for. A consumer shops for a service provider when he/she she is free to select the provider of his/her choice. Lenders may impose reasonable requirements on the service provider’s qualifications, such as ensuring the settlement provider is appropriately licensed. However, requiring that a provider use a certain type of software would not be considered a reasonable requirement. Any lender provider requirements should correspond to the ability of the provider to perform the service in a competent manner.
In contrast, a consumer is considered not to have the ability to shop for a provider if the lender selects the provider and offers the consumer no other alternative. Note that if the lender limits the service provider choices to a list selected by the lender, the consumer is not considered able to shop.
Are lenders required to allow service provider shopping?
Lenders have considerable leeway in determining which services may or may not be shopped for. On one end of the spectrum, a lender could select all settlement service providers and not allow any consumer shopping. Typically, lenders allow consumers to shop for some but not all service providers. Note that state law may require that a borrower be able to select their own attorney, which would mean the borrower must be able to shop for that provider. And remember, fees for required services that may not be shopped for are subject to the zero-fee tolerance threshold.
What is the Written List of Service Providers?
If the consumer may shop for a settlement service provider, the lender must provide a written list of service providers (written list). The written list is a separate disclosure that must also be provided within three business days of receiving an application.
From a disclosure perspective, the written list must identify at least one provider per service that may be shopped for and include detailed contact information for each provider. The providers disclosed on the written list must correspond to those services disclosed on page two of the loan estimate, in section C. The written list must also state that the consumer is not required to select the provider disclosed on the written list. Note that the TRID rule provides a model form for the written list; however, lenders may create their own document but it must track the model form. In addition to disclosing services the consumer may shop for on the written list, lenders may also disclose those services that may not be shopped for. And, the lender may include a statement that it is not endorsing any provider disclosed on the written list.
What are the fee tolerances for services that may be shopped for?
At the Loan Estimate stage, fees for services that may be shopped for are included in the 10 percent tolerance category. This tolerance may or may not shift at the closing disclosure stage, depending upon whether the consumer chooses a provider from the written list.
If the consumer selects a provider from the written list, the fee for that service remains in the 10 percent cumulative tolerance category. If the consumer selects a provider that is not on the written list, the fee for provider shifts to the no tolerance category. As long as the service provider fee is disclosed on the written list is in good faith, increases in that fee will not be subject to any tolerance restrictions. Because of the potential shift in tolerance, it’s important to monitor consumer shopping activity.
What are the consequences for failing to comply with the written list requirements?
Failure to comply with the written list requirements may result in changes to fee tolerances and may constitute a Regulation Z violation. If the lender fails to provide the written list, but the facts and circumstances indicate the consumer was permitted to shop, the fees for the service are subject to the 10% cumulative tolerance standard. However, if those fees are paid to the lender or an affiliate, they are subject to the zero tolerance standard. Note that even if the consumer is considered permitted to shop, failure to provide the written list would be considered a Reg Z violation.
With respect to errors or omissions on the written list, if the consumer is not prevented from shopping and the fees are not paid to the lender or an affiliate, the fees are subject to the 10% cumulative tolerance standard. If the error or omission does prevent the consumer from shopping, the charges are subject to the zero tolerance standard. Determining whether the error or omission prevents the consumer from shopping is based on all of the relevant facts and circumstances.
While TRID compliance often focuses on the loan estimate and the closing disclosure, it’s important to train staff on the written list of service provider requirements. Potential shifts in tolerance thresholds and compliance violations can certainly add up over time.
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