The penalties mortgage lenders must pay when disclosed closing costs exceed specified tolerances can really add up.
Certain fee compliance errors have serious costs for home lenders, with tolerance cures alone totalling more than $1 million per 1,000 loans, according to a 2024 ICE Mortgage Technology study. Such cures showed up in nearly 40% of the loans studied.
“You might think that these fees are a couple hundred dollars, but if you get a transfer tax change that is really significant, it can be very, very expensive,” said Leah Strommer, product director for ICE Fee Solutions.
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Transfer taxes on real estate are one of the biggest concerns because they have a 0% tolerance under rules for disclosures under the Truth in Lending and Real Estate Settlement Procedures acts. Other fees have an aggregate 10% or unlimited tolerance.
Not all variances between the initial loan estimate and final closing costs result in fee cures under TILA-RESPA but having a high percentage of changes is a good indication that there will be some, according to Brad Stumpe, partner at Anders CPAs + Advisors.
“Many of the errors we see regarding the content of LEs are simply technical violations and do not result in tolerance cures but if there are too many of those technical errors not only can examiners point to it as a weakness in your system but it increases the chance that one or more of those technical errors do result in a reimbursement,” Stumpe said in a webinar.
To get a sense of how extreme differences in transfer taxes can get, consider the jumbo mortgage market in Los Angeles.
In a single day in 2023, the transfer tax rate for Los Angeles buyers who paid over $5 million for their homes went from just 0.56% of the valuation or consideration paid to 4% or more. If they bought houses costing $10 million or more, the percentage went up to 5.5%.
“To add some color to that, if I’m getting ready to buy a home, and my transfer tax was quoted to be $49,500 on March 31 that year, the very next day on April 1, when that ballot went into effect, I’m going to be asked to pay $654,500,” Strommer said. “So if I’m a lender, and I didn’t catch that, then that’s an over $600,000 fee cure. If I have, say, 10 loans in the pipeline, now you’re looking at over $6 million, not even including the operational costs.”
Transfer tax measures seem to have slowed down somewhat since the incidence of them picked up just prior to the pandemic but attempts continue. St. Helena, California tried to institute a mansion tax for property over $1 billion last year. The referendum failed, according to the Institute on Taxation and Policy. Other cities that, like Los Angeles, have successfully instituted mansion taxes include New York.
Also, changes can be an ongoing concern as Los Angeles’ adjustments to its mansion tax over time. Since June 30 of this year, the 4% tax rate applies to properties over $5.15 million but below $10.3 million. The tax rate above $10.3 million is 5.5%.
“If we look at Los Angeles, I know that’s an extreme example but it’s also a perfect example because there were people that were affected by that,” Strommer said. “The difference between closing on a Tuesday versus closing a Friday has been astronomical in some cases.”
