Appraisal Tolerance: Closing & Lender Credits

Appraisals are generally included in Section B (services the borrower cannot/did not shop for) on the loan estimate and the closing disclosure.

Suppose that you disclose the cost of the appraisal in section B of the loan estimate at $500. Then suppose that the actual cost of the appraisal is $750, and that the increase did not involve a change in circumstance that the lender could have used to redisclose at the larger amount on a revised loan estimate. So the lender has identified a $250 increase in a service that is subject to a 0% cost increase tolerance under 1026.19(e)(3)(i).

Pay once, not twice, for the mistake.
Since the lender identifies the increase before the closing, the lender can list the appraisal total in two pieces on the same line in Section B on page 2 of the closing disclosure. Let's assume that the borrower prepaid the estimated $500 at the time he gave the lender his intent to proceed with the application. Enter the label for the Appraisal fee on a line in Section B. Remember that entries in this section have to be in alphabetic order, so the Appraisal Fee will be near the top of the list. Then enter the $500.00 that was prepaid by the borrower on the same line, in the Borrower Paid - Before Closing column. Enter the $250.00 increase on the same line, but in the Paid by Others column, with an "(L)" -- without the quotation marks -- to the left side of the column.

The bank will pay for the increased amount, but not as a tolerance violation. Why? Because the amount paid by or imposed on the consumer is only $500 -- which is the amount on the loan estimate. Because there is no tolerance violation, there is no increase in the lender credit to compensate the consumer for the overcharge, and no "mea culpa" language added to the Calculating Cash to Close table or the Lender Credit.

You can do this with one or more costs that have increased beyond what is permitted under the tolerance rules. If the 10% aggregate costs run over, you can spread the amount in excess of the 10% limit over one or more of the services in that aggregate group.

Tolerance violations discovered after closing
Now let's suppose you mess up and fail to catch an over-limit increase, and the borrower ends up being charged for it. You discover the error in a post-closing audit of the file, and determine that the borrower paid $750 for an appraisal that was estimated at $500. How could that happen? Well let's assume your underwriting department or the lender discovers that the loan will be an HPML, and orders an enhanced appraisal including an inspection of the interior of the property, but doesn't arrange for a revised loan estimate with the $250 increase required by that change until a week later. In your post-closing audit, you discover that the revised loan estimate was not sent within the three business days required, making the cost "basis" for the appraisal the original $500 amount, not the increased $750 amount. So your post-closing audit determines that there was a tolerance violation and a $250 refund cure will be required.

In this case, a revised closing disclosure has to be completed, showing the full $750 ($500 before closing, $250 at closing) in the Borrower-Paid column in Section B and showing the reduced loan estimate total closing costs in the Loan Estimate column of the Calculating Cash to Close table and a "mea culpa" -- about the illegal increase of $250.00 as suggested in the sample closing disclosure provided by the Bureau. A similar "mea culpa" will appear as part of the label for the increased Lender Credits amount at the bottom of Section J on page 2 of the revised closing disclosure. You'll provide the revised closing disclosure with the cashier's check for $250.00 for the tolerance cure, and, probably, a letter of explanation.

Note that the end result under both scenarios is that the lender pays the $250. In the first example, there's no tolerance violation because the borrower wasn't charged the higher amount. In the second example (the one in which the error was discovered post closing), there is a tolerance violation followed by a cure payment to the borrower and a revised closing disclosure.