In today’s Federal Register the CFPB published a correction to the TILA/RESPA Integrated Disclosure (TRID) rule supplementary information as published on December 31, 2013 with regard to property taxes and certain similar charges.  The move apparently is intended to address an apparent oversight in the TRID rule regarding the treatment for tolerance purposes of property taxes and similar charges paid in advance, but not into an escrow or impound account.  However, it does not appear that the CFPB’s actions actually address the issue in the appropriate manner.

In the pre-TRID rule environment, property taxes, homeowner’s association dues, condominium fees and cooperative fees that a borrower was required to pay in advance to the applicable parties (and not into an escrow or impound account) were not subject to a specific percentage tolerance.  However, based on a typographical error in the supplementary information to the TRID rule, such charges were referred to as charges that were subject to tolerances in both the TRID rule and pre-TRID rule worlds.  While that was unfortunate, the bigger problem was the TRID rule itself.

In the pre-TRID rule environment, fees and charges were not subject to any tolerance unless Regulation X under RESPA specifically provided that the fee or charge was subject to the 0% tolerance or the 10% aggregate tolerance.  The TRID rule takes a different approach in that every fee and charge is subject to the good faith standard, unless there is an express exception.  The good faith standard effectively imposes a 0% tolerance on fees and charges, unless an exception applies.  Due to an apparent oversight, in identifying fees and charges that are not subject to a tolerance the CFPB neglected to list property taxes, homeowner’s association dues, condominium fees and cooperative fees that a borrower is required to pay in advance to the applicable parties (and not into an escrow or impound account).  Thus, it appeared to many in the industry that such items are subject to an effective 0% tolerance.

After this issue was raised with the CFPB with regard to property taxes, the CFPB staff informally advised that property taxes are charges paid for third party services not required by the creditor.  Under the TRID rule, charges paid for third party services not required by the creditor are not subject to any specific percentage tolerance.  The CFPB now states in the Federal Register release that property taxes, homeowner’s association dues, condominium fees and cooperative fees are charges paid for third party services not required by the creditor.  The CFPB also corrects the typographical error in the supplementary information to the TRID rule to provide that property taxes, homeowner’s association dues, condominium fees and cooperative fees are not subject to tolerances.  The CFPB, however, does not actually amend the TRID rule.

It is questionable if the CFPB’s actions address in the appropriate manner the issue regarding property taxes, homeowner’s association dues, condominium fees and cooperative fees that a borrower is required to pay in advance to the applicable parties (and not into an escrow or impound account).  Although the CFPB states that property taxes, homeowner’s association dues, condominium fees and cooperative fees are charges paid for third party services not required by the creditor, often a creditor will require that such items due within a certain period of time after closing be paid by the borrower.  So, in many cases these items are in fact charges that the creditor requires to be paid.  Also, in addressing recording fees, the TRID rule commentary provides that “Recording fees are not charges for third-party services because recording fees are paid to the applicable government entity where the documents related to the mortgage transaction are recorded . . . .”  If recording fees are not charges for third party services, how are property taxes charges for third party services?

The definitive way to address this issue is to simply amend the TRID rule to add an item (F) to section 1026.19(e)(3)(iii) to read as follows: “(F) Property taxes, homeowner’s association dues, condominium fees and cooperative fees, whether or not paid into an escrow, impound, reserve or similar account.”  We hope that the CFPB will act promptly to propose amendments to the TRID rule to address this and other important issues.