Evaluating the CFPB – Cash to Close and the Down Payment Problem

Recently, we provided a comment letter for the CFPB. We covered a great deal of ground in our letter and could only give you the briefest of overviews in our post. After it was published, the post got a lot of attention and we were asked for more specifics about our comments.

We’ll dive a bit deeper into the information we sent the CFPB in order to answer those questions. The first topic we want to tackle is the Cash to Close table and the issues surrounding it, especially the potential confusion facing borrowers in situations where closing costs are financed.

Our commentary on Cash to Close

In the Loan Estimate, the amount for Closing Costs Financed in the Calculating Cash to Close table is proposed to be arrived at by following the calculation method set forth in proposed Official Staff Comment 37(h)(1)(ii)-1:

“The amount of closing costs financed disclosed under § 1026.37(h)(1)(ii) is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed under § 1026.37(f) and (g) from the loan amount disclosed under § 1026.37(b)(1). The estimated total amount of payments to third parties may include the sale price disclosed under § 1026.37(a)(7), if applicable. If the result of the calculation is a positive number, that amount is disclosed as a negative number under § 1026.37(h)(1)(ii), but only to the extent that the absolute value of the amount disclosed under § 1026.37(h)(1)(ii) does not exceed the total amount of closing costs disclosed under § 1026.37(g)(6). If the result of the calculation is zero or negative, the amount of $0 is disclosed under § 1026.37(h)(1)(ii).”

This proposed Comment does not change this calculation very much, except for the explicit instruction that the estimated total amount of payments to third parties should include the sales price of the property when applicable. This change is welcomed, but is not a significant concern.

The larger concern surrounding the Closing Costs Financed amount has always been the instructions given for calculating this amount on the Closing Disclosure, as promulgated under12 CFR § 1026.38(i)(3)(ii):

“Under the subheading ‘Final,’ the actual amount of the closing costs that are to be paid out of loan proceeds, if any, stated as a negative number.”

Proposed Comment 38(i)(3)-1 gives the calculation of the Closing Costs Financed amount as follows:

“Calculation of amount. The amount of closing costs financed disclosed under § 1026.38(i)(3) is determined by subtracting the total amount of payments to third parties not otherwise disclosed under § 1026.38(f) and (g) from the loan amount disclosed under § 1026.38(b). The total amount of payments to third parties includes the sale price of the property disclosed under § 1026.38(j)(1)(ii). If the result of the calculation is zero or negative, the amount of $0.00 is disclosed under § 1026.38(i)(3). If the result of the calculation is positive, that amount is disclosed as a negative number under § 1026.38(i)(3), but only to the extent that the absolute value of the amount disclosed under § 1026.38(i)(3) does not exceed the total amount of closing costs disclosed under § 1026.38(h)(1). (The total amount of closing costs disclosed under § 1026.38(h)(1) will never be less than zero because, if the total amount of closing costs disclosed under § 1026.38(h)(1) is a negative number, the amount of $0.00 is disclosed under § 1026.38(i)(3).)”

This Comment prescribes essentially the same calculation as on the Loan Estimate for the Closing Costs Financed amount. Using the same calculation on the Closing Disclosure as on the Loan Estimate would provide greater consistency when comparing these amounts across the two forms; that this is desirable goes without saying.

However, there are two problems with the Closing Costs Financed calculations that may require revision:

1) Although the calculation for the Closing Costs Financed amount is now given in proposed Comment 38(i)(3)-1, the text of the regulation this Comment is associated with (12 CFR § 1026.38[i][3][ii]) is not slated for any changes.

 

2) The result of the calculation for Closing Costs Financed would not necessarily yield the amount of closing costs that were actually financed from the loan amount. A more accurate phrase would be “the amount resulting from the calculation in 38(i)(3)”.

For most clients, problem #2 is of most concern. It’s a step in the right direction that the Closing Costs Financed amounts would be consistent and the calculations match, but it is problematic for a client to tell a borrower that they are going to have a certain amount of their closing costs financed, only to see a different amount in the Closing Costs Financed lines in the Calculating Cash to Close tables.

The Down Payment Problem

On the Loan Estimate and Closing Disclosure, the Down Payment/Funds from Borrower row has a complicated calculation that the Proposed Amendments improve on, especially with the proposed modification of 12 CFR § 1026.38(i)(4)(ii)(A)(1) and the addition of Ibid. § 1026.38(i)(4)(ii)(A)(2), as shown here:

“(1) In a purchase transaction that is a purchase as defined in § 1026.37(a)(9)(i), the amount of the difference between the purchase price of the property and the principal amount of the credit extended, stated as a positive number determined by subtracting the sum of the loan amount disclosed under paragraph (b) of this section, and any amount of existing loans assumed or taken subject to disclosed under paragraph (j)(2)(iv) of this section from the sale price of the property disclosed under paragraph (j)(1)(ii) of this section, labeled ‘Down Payment/Funds from Borrower,’ except as required by paragraph (i)(4)(ii)(A)(2) of this section;

(2) In a purchase transaction as defined in § 1026.37(a)(9)(i), when the sum of the loan amount disclosed under paragraph (b) of this section, and any amount of existing loans assumed or taken subject to disclosed under paragraph (j)(2)(iv) of this section exceeds the sale price disclosed under paragraph (j)(1)(ii) of this section, the amount of funds from the consumer as determined in accordance with paragraph (i)(6)(iv) of this section labeled ‘Down Payment/Funds from Borrower;’”

The only problematic portion of this change is the fact that, much like the Closing Costs Financed amount above, the Down Payment/Funds from Borrower amount would not necessarily reflect the amount of the borrower’s down payment as they understand it. Comment § 1026.38(i)(4)(ii)(A)-1 acknowledges this somewhat:

“Down payment. Under § 1026.38(i)(4)(ii)(A)(1), the down payment is calculated as the difference between the sale price of the property and the sum of the loan amount disclosed under § 1026.38(b) and any amount of existing loans assumed or taken subject to disclosed under § 1026.38(j)(2)(iv). Minimum cash investments required of borrowers under some loan programs are not necessarily reflected, and accurate disclosure of the down payment under § 1026.38(i)(4)(ii)(A)(1) does not affect compliance or non-compliance with such loan programs’ requirements. The ‘Final’ amount disclosed for ‘Down Payment/Funds from Borrower’ reflects any change, following delivery of the Loan Estimate, in the amount of down payment required of the consumer. This change might result, for example, from an increase in the purchase price of the property.”

In any case where the borrower contributes a down payment towards the purchase or construction of a home, they will most likely expect that the amount contributed would match the amount in the Down Payment/Funds for Borrower rows on the Loan Estimate and Closing Disclosure. This is true regardless of whether or not compliance in relation to minimum cash investment requirements are met.

It is Docutech’s opinion that the entire difficulty with the Down Payment misunderstanding could be avoided by the removal of the label “Down Payment” on the LE and CD, and the rephrasing of the portions of the regulation that refer to the Down Payment. The amount arrived at by the calculation in 38(i)(4) is better described solely as “Funds from Borrower”.

In our next post, we will tackle the CFPB’s stance on tolerance amounts, stay tuned.