Under the rule, tolerances are actually structured differently than they were under Reg X. Reg X, which implemented the previous disclosures, the GFE and the HUD-1, basically carved out charges and placed them in the zero percent, 10 percent categories. Whereas TRID makes the zero percent category the default category, and basically then carves things out of the zero percent category into the 10 percent category, or the category of charges that are not subject to a specific tolerance, the no tolerance category. And a lot of typical charges are included in that no tolerance category, like the escrows, and the prepaid interest and such, but unfortunately, one such charge that was left out expressly are the pre-paid property taxes. So, pre-paid property taxes are not expressly carved out into any particular category, the 10 percent or no tolerance, and so arguably, they’ve then fallen under zero percent tolerance under the plain language reading of the rule.
The CFPB has clarified in informal guidance though, and they’ve given this guidance out in public settings such as MBA’s regulatory conference and such, so they’ve stated this to many hundreds of people. In their view, prepaid property taxes are not subject to zero percent tolerance because they are not charges that are required by the creditor, they are property taxes that are required by the government entity in which the property is located, and they have to be paid regardless of whether the borrower is taking out a loan or not, and so in their view it’s not a charge that’s subject to tolerance.
There actually is an element of the no tolerance category, which is, charges not required by the creditor. So there is some support for that interpretation, and so some lenders have been following that, I think reasonable interpretation of the Bureau, but some lenders and investors decided to take a more conservative route and apply zero percent tolerance to it.
[Note from Richard Horn: the CFPB formally stated its interpretation in a Federal Register notice it published on February 10, 2016.]
Answered By: Richard Horn