[kmeade]

If an error is found on the Closing Disclosure (CD) after closing that requires a refund to the borrower can the refund, be applied to the principal of the loan? Reading 1026.38 paragraph 4 it sounds like the refund could be applied as a reduction to the principal balance in conjunction with a corrected CD, issued no later than 60 days after consummation.

[rcooper]

Yes you can. The SECG state:
If the amounts paid by the consumer at closing exceed the amounts disclosed by more than the applicable tolerance threshold, the creditor must provide a corrected Closing Disclosure and provide a cure for a tolerance violation no later than 60 calendar days after consummation. The refund need not be in the form of a cash refund to the consumer.

Creditors can cure tolerance violations in many ways. For example, a cure for a tolerance violation can be provided by:
 Providing a refund directly to the consumer;
 Providing a principal reduction;
 Providing lender credits, either specific or general, to the consumer.

You will need to follow the instructions outlined in 38-4 for how to disclose the principal reduction on the CD you will send to the borrower.

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