Escrow holdbacks are new to me and as I understand them, the bank would hold back funds for the loan and only disburse them to the borrower or seller when work that has been agreed to is completed. I understand there would be a separate agreement in place for the holdback of funds. I could use some help understanding whether/how these are disclosed on the LE/CD.

Seems to me that nothing would be disclosed on the LE since this is merely a holdback of loan proceeds. Is this right?

If the holdback is from borrower proceeds must this be listed on the CD? Where?

If the holdback is from the seller's proceeds must this be listed on the CD? Where?

Thanks much,

It is an unrelated contract term to either the LE or CloD.

Thank you.

I think we have to include the escrow holdback amount on the CD in the section labeled "Due from Seller at Closing" (if the seller pays for it). Am I missing something or reading this wrong?

1026.38(k)(2)(viii)-3: "3. Escrows held by closing agent for payment of invoices received after consummation. Funds to be held by the closing agent for the payment of either repairs, or water, fuel, or other utility bills that cannot be prorated between the parties at closing because the amounts used by the seller prior to closing are not yet known must be disclosed under § 1026.38(k)(2)(viii). Subsequent disclosure of the actual amount of these post-closing items to be paid from closing funds is optional."

Well, that might be my fault as the way I originally read your OP was that the escrow would be funded from the borrower's loan proceeds and not seller provided funds. But I see now you asked both questions. Sorry, I guess I read it too quickly.

No problem, rlcarey. Thanks for your help!

I can't speak for Loan Compliance, but I believe escrow holdbacks in our neck of the woods are really the funds for a construction loan that cannot be disbursed until work is completed. The funds are held by the title company until evidence of work completion is provided by the borrower. I'm not sure whether we treat these like a disbursement and list the holdback amount in the Due from borrower section of the Borrower's transaction table or in the adjustments section. It seems like we need to account for the hold back of the loan proceeds otherwise the Closing Disclosure will look like we are disbursing the balance of the construction loan to the borrower at closing when in fact, the holdback amount is not yet available to the borrower. We are thinking that perhaps it should go on line 4 of the Due From borrower section of the borrower's transaction table. Then when computing cash to close we treat it as a disbursement. Thoughts?

Resurrecting this topic a bit, as it didn't really get a sufficient amount of comments to provide clarity. I agree with Another Day in Paradise for sure on amounts that are established by the Seller to deal with repairs. Such a scenario is clearly covered in the Reg. citation noted above. What becomes a little more tricky is for situations where amounts are being set aside to complete repairs that are borrower-paid. This is common with 203K loans. My analysis on this topic previously led me to conclude that such an amount belongs in Section K of the CD and would be disclosed on the LE in the Adjustments and Other Credits line of the Calculating Cash to Close table. I do not fully remember my reasoning, but I did not believe such a "cost" belonged in Section H, as the Regulation mentions "charges for services," which is really not what is taking place at the closing.

Also, how are others dealing with amounts for inspections that are performed after the closing? So, in the escrow holdback amount that is collected, there will also be amounts for draw inspections. Such inspections will take place a few months after closing even and are not always fully known. Where are these items properly disclosed on the LE/CD? Do you put them in Section B (If Lender selects provider) and mark paid to the provider based on bid estimates, etc., or something else?

As for the post-closing inspection fees, if they are charged and paid at closing, they are finance charges and go in section A or B typically (I can't imagine allowing the borrower to select the provider of this service, but that's based on my experience. Your mileage may vary, as they say.

If the fees aren't collected until later, they are post consummation events. Under current rules, I don't see a place for disclosing them, or a requirement to do so. The Bureau is proposing changes to the rule to require they be disclosed in a addendum to the CloD. I've already seen some negative comments on that part of the proposal.

Do you not have a contract for repairs? How do you know the amount of the required holdback?

They must have something they use for an estimate. All I am looking at is a spreadsheet that says "Total Rehabilitation Cost." They do collect a bit of a cushion above what the estimate would be for though, to account for cost overruns with the contracted work.

John -- The Draw Inspection Fees are "paid" at closing, in the sense that they are financed into the loan amount. That seems to be creating another issue as the LE and CD Calculating Cash to Close sections are not recognizing these as being financed from the loan proceeds.

So, with the lump sum that is collected for all the future fees that are considered post consummation events, where do you believe this should be described on the LE/CD?

I would be treating this similar to construction proceeds - see construction webinar.

The subsequent inspections have to get into your APR calculations - they probably belong in Section A if you have not selected a provider.

Construction Proceeds are generally funded by the loan though. On several occasions, the borrower or seller is funding the holdback amount for repairs themselves.

It doesn't matter - it will still end up in either the cash to close from the borrower or a seller credit.