Question: We are lenders and our Loan Origination System (LOS) caused an error in the APR of a residential mortgage loan transaction. Given that this was not our error, but the error of the system itself, are we protected from liability?
Answer: Just because there is an error in an APR or a finance charge in a loan transaction does not constitute a violation per se. But this condition would only apply if (1) the error results from a correlative error in calculation of the Loan Origination System (LOS) used in good faith, and (2) when the error is discovered, the lender promptly discontinues use of the system for disclosure purposes. The lender should notify its Regulator in writing regarding the cause of the error. [12 CFR § 226.22(a)(1), Footnote 45d]
The dispositive feature of acting in “good faith” can be challenging to prove; therefore, the lender should demonstrate that it took steps to reasonably ensure that the LOS was functioning accurately before it was used to generate the disclosures containing APR or finance charge calculations.
Protection from liability is only available on the basis of being able to unarguably prove that the LOS, or any system used for disclosure calculations, caused the error. No protection from liability is available in instances where there is a misapplication of the law, or the lender manually causes this type of error, for instance through incorrect data entry. [12 CFR Supplement I to 226, Official Staff Commentary § 226.22(a)(1)-5]
Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or by e-mail at firstname.lastname@example.org.