By Scott Hutchison, Branch Counsel
QUESTION: Now that your heads are about to explode with questions surrounding the Know Before You Owe (“KB-YO”) disclosures, let’s pile-on a little more. Recently, I received a call from an attorney representing a buyer in a residential real estate transaction asking: “If I’m representing a buyer in a transaction, do I have to disclose an estimated fee to my client’s lender for purposes of the Loan Estimate (“LE”), then follow that up with a final bill 3 business days prior to closing for purposes of the Closing Disclosure (“CD”)?
ATTORNEY’S DILEMMA: I understand the attorney’s dilemma. The attorney may be billing the client on an hourly basis, and the invoice for legal services may not be mailed until a week or two after the closing. In other words, he or she may not know what the final billing amount is going to be 3 days prior to closing. In addition rarely, if ever, are attorney’s fees for a buyer paid as part of the settlement and I do not see that as a changing trend. Finally, the attorney’s services have nothing to do with the fees the lender is charging the buyer in connection with the loan nor are the fees part of the contract between the buyer and seller. The lawyer has been retained by the buyer as an advocate and counselor to the buyer. Arguably, it is completely understood between the buyer/client and the attorney (by virtue of the Retainer Agreement signed by the parties) that the services provided are fees above and beyond the fees associated with the loan or the Offer to Purchase. In addition, the buyer/client has his or her own vehicle for lodging complaints associated with the legal representation or the fees charged (in Wisconsin, Office of Lawyer Regulation).
LENDER’S DILEMMA: On the other hand, lenders will be taking a very conservative approach to interpreting the KB-YO language because no one wants to be the test case when the CFPB looks to assess penalties for rule violations. From the lender’s perspective, if the attorney drafted the Offer to Purchase and/or the bank has knowledge of the existence of the attorney acting on behalf of the buyer, the attorney is arguably a third-party participant in the loan transaction, especially if the attorney is requesting copies of the disclosures and/or other loan documents during the process.
RESOLUTION? How far does KB-YO extend? Is the scope of the KB-YO disclosures intended to include fees that a buyer’s attorney may charge its client completely outside of the settlement with the lender and seller? What if the legal fees are being paid as part of the settlement? Does that change the analysis?
For lenders answering this question, we anticipate that the conservative approach will be to disclose the attorney’s fees in Block C of the LE (titled “Services You Can Shop For”) and in Block C of the CD (titled “Services Borrower Did Shop For”).
For attorneys answering the question it may be a little bit more difficult, as the attorney’s final invoice may and probably will not be available at the settlement - so can the attorney collect a part of his/her fees at the settlement with the balance post-closing?
So who’s right? Given that failure to make the correct disclosure can subject the lender to a $5,000, $25,000 or even $1,000,000 penalty from the Consumer Financial Protection Bureau (“CFPB”), the lender will want to be better safe than sorry and disclose the fees on the LE and CD. Attorneys may wish to re-evaluate their Retainer Agreements and modify as need be.
IS THIS THE FINAL RESOLUTION? Absolutely not. The KB-YO rules are in place but with a number of questions outstanding, as illustrated above. We anticipate that in the coming weeks and months the CFPB will provide further guidance, and Knight Barry will be here to help guide you through the maze.