Disclosures And Documents - Chapter 18 Flashcards
What’s A Disclosure?
In simple terms, to disclose means to tell or inform. In our business, there are three types of disclosure requirements: basic, written, and form.
Basic Disclosure
The basic disclosure means that the law compels (requires) the MLO to disclose to the borrower certain information like, “you should keep all of the documents you receive for this transaction.” Basic disclosures do not have specific requirements for how they must be provided to the borrower, but most MLOs provide them in written form to ensure the borrower can keep a copy.
Written Disclosure
Disclosures that must be provided in writing.
TRID
The Dodd-Frank Act required improved consumer mortgage disclosures, and so the CFPB developed the TILA- RESPA Integrated Disclosure Rule (TRID), also known as the Know Before You Owe Rule (KBYO), to simplify the information provided to mortgage borrowers in the disclosures required by TILA and RESPA. In essence, TRID used the information found in two already existing early disclosures - the Good Faith Estimate (GFE) from RESPA and the Initial Truth in Lending statement (TIL) from TILA – as a basis for the creation of the Loan Estimate. Likewise, TRID used the information found in two already existing final disclosures - the HUD-1 Settlement Statement (HUD- 1) from RESPA and the Final Truth in Lending statement (TIL) from TILA – as a basis for the creation of the Closing Disclosure.
Simplifying TRID
The TILA-RESPA Integrated Disclosure Rule calls for combining some of the disclosure requirements under RESPA and TILA into more consumer-friendly documents. The details of settlement costs and finance charges that were once provided to the borrower in separate forms are now combined in the Loan Estimate and the Closing Disclosure. TRID applies to all closed end mortgages.
TRID does NOT apply to open-end forms of credit. This means that reverse mortgages and HELOCs are exempt from the requirements of TRID.
TRID was created to simplify the information provided to mortgage loan borrowers. The early disclosure requirement for TRID is met by the Loan Estimate, which provides an estimate of settlement and finance costs. The Closing Disclosure is provided as a final disclosure and provides the final costs for settlement and financing.
TRID also added some new specific requirements to the mortgage loan origination process. The requirement to gain an “intent to proceed” from the borrower which resides in Section 19 of TILA (MDIA) is a result of TRID. To review, a borrower must provide their intent to proceed with the loan process to the MLO prior to being charged any fees. The intent to proceed may be provided verbally, electronically or in written form. The MLO is obligated to retain a record of this intent for a period of 3 years from the date upon which it was received.
Charges And Fees Disclosed
The TRID disclosures provide information about numerous costs and fees that previously were disclosed on multiple disclosure documents. This reduction in paperwork simplifies the process for consumers. The following costs and fees are available on the TRID disclosures and broken down into two categories - Loan Costs and Other Costs:
Loan Costs Governed by TILA:
• Origination charges
• Services required by the lender
Other Costs Governed by RESPA: • Taxes and government fees • Prepaid items • Escrow payments • Owner’s title insurance
The Loan Estimate
The Loan Estimate (LE) is a three-page document containing an estimate of credit terms and closing costs. The LE is delivered at the time of application. Think of it as the borrower’s menu – it tells the borrower what everything costs.
Information on the Loan Estimate is valid for 10 business days from the date of disclosure. This means that the borrower must provide their intent to proceed within 10 business days.
If the borrower does not provide their intent within the 10-day period, a new LE must be generated based on the new current circumstances. These new circumstances may include changes in the borrower’s qualification profile.
The LE must be retained for three years from the date of consummation by the MLO or lender.
The Loan Estimate should help the consumer recognize and comprehend the expense, risk, and characteristics of the loan for which they are applying.
The Loan Estimate contains a good faith estimate of the charges in dollar form a borrower may face throughout the loan process. These estimates are good for 10 business days from when the Loan Estimate is provided. It also contains other essential
information related to the loan, e.g., the interest rate and the annual percentage rate.
Revised LEs must have reasons for revision. A main thing to note about the Loan Estimate is that a mortgage loan originator cannot charge or collect any fee, except for a credit report fee, until the Loan Estimate has been disclosed and the potential borrower has explicitly expressed their “intent to proceed.”
Loan Estimate - Page One
Page one is a summary of the transaction and is directly comparable to the Closing Disclosure in terms of the information provided.
Loan Term
This section provides the important information about Loan Amount, Interest Rate, a projected Monthly Principal & Interest payment, and whether or not the loan contains a Prepayment Penalty or Balloon Payment. This section also asks the question, “Can this amount increase after closing?” If the answer listed is yes, this could signify that the loan has the possibility of negative amortization or is an ARM.
Projected Payments
This section breaks down the estimated total monthly mortgage payment. This shows whether a loan has any associated mortgage insurance or fee.
This section also breaks down if there is an escrow account and an estimate of how much the escrow payment could be. Another thing this section breaks
down is whether the payment will change throughout the life of the loan.
Costs At Closing
The final section on page one is titled Costs at Closing. This separates and explains the Estimated Closing Costs and the Estimated Cash to Close. The
Estimated Closing Costs are broken down further on page two. The Estimated Cash to Close includes the Estimated Closing Costs as well as any extra funds a borrower would need, such as the down payment.
Loan Estimate - Page Two
Page two is titled Closing Cost Details and is an initial overview and estimate of nearly all the costs a borrower may be charged for obtaining the loan as well as any costs for necessary third party services. It breaks down into three sections: Loan Costs, Other Costs, and Calculating Cash to Close.
Loan Costs:
The first section on page two of the Loan Estimate is titled Loan Costs and is divided into subsections A - D.
• Subsection A is titled Origination Costs. These are the costs the mortgage loan originator charges for originating the loan. These costs may include any discount points a borrower will pay or any rebates the borrower will receive. The cost of these services cannot change at closing.
• Subsection B is titled Services You Cannot Shop For. These are necessary costs of the loan process. Some main costs that fall under this category are an appraisal fee, a credit report fee, and a flood determination fee. A borrower cannot
shop for these services for a couple different reasons. For example, a borrower cannot choose who does their appraisal as it could easily lead to fraud. Another example is a borrower cannot choose where their credit report comes from, since there are only three generally accepted credit reporting agencies and normally
a lender will look at all three, using the middle score for qualification purposes. The cost of these services as a whole may change by up to 10% at closing.
• Subsection C is titled Services You Can Shop For. It includes other necessary costs of the loan process. A couple main charges under this subsection are a pest inspection fee, a survey fee, and title-related fees. Typically, a mortgage loan originator will provide a list of suggestions for these services, although a borrower can choose whoever they desire to perform these services. If the
borrower chooses a provider suggested by the MLO, the threshold for change is the same with the cost variance of 10% listed for subsection B. If the borrower chooses a provider not recommended by the MLO there are no limits on a variance of cost.
• Subsection D is titled Total Loan Costs. It is the sum of subsections A, B, and C.
Other Costs
The second section on page two of the Loan Estimate is titled Other Costs. It is broken down into additional subsections E - J.
• Subsection E is titled Taxes and Other Government Fees. The main fee here is the transfer tax. It is the cost the government charges for processing and recording the transfer of ownership interest in the property.
• Subsection F is titled Prepaids. The main costs under this subsection are homeowners insurance, property taxes, prepaid interest, and any applicable mortgage insurance, guaranty, or funding fee. A borrower must pay these various charges in advance of when they are technically due, hence the term prepaid. A borrower often pays for 1 to 12 months of these items prior to or at closing.
• Subsection G is titled Initial Escrow Payment at Closing. This subsection breaks down any necessary escrow payments needed at or before settlement.
• Subsection H is titled Other. The services found here are usually optional, such as an owner’s title policy or a pest inspection fee.
• Subsection I is titled Total Other Costs. It is a sum of the costs in subsections E, F, G, and H.
• Subsection J is titled Total Closing Costs. It is a sum of the Total Loan Costs (subsection D) and Total Other Costs (Subsection I).
Calculating Cash To Close:
The third section on page two is titled calculating Cash to Close. This is an estimated summation of all funds necessary for the borrower to close their loan. The main things in this section are the Total Closing Costs (Subsection J) as well as any down payment, earnest money deposit, or other adjustments. Many times in a purchase transaction a borrower puts down an earnest money deposit that gets deposited into a trust account. Since the borrower paid this in advance, it is subtracted from the total amount of funds required
Loan Estimate - Page Three
Page three is titled Additional Information About This Loan. It shows the information about the mortgage loan originator or originators involved in the loan process. It also breaks down into three sections: Comparisons, Other Considerations, and Confirm Receipt.
Comparisons:
The first section on page three is titled Comparisons. It is meant to be used by the borrower as a tool for shopping for other comparable loans. This section includes a breakdown of how much principal and interest a borrower will have paid off in the first 5 years of their loan. This section also includes the Annual Percentage Rate (APR) and the Total Interest Percentage (TIP). As the Loan Estimate states, the TIP is “the total amount of interest that you will pay over
the loan term as a percentage of your loan amount.”
If there is a changed circumstance that causes the APR to change by more than 1/8 of 1% on fixed-rate loans or 1/4 of 1% on ARMs, the initial LE needs to be re-disclosed with the updated costs.
Other Considerations:
The second section on page three is titled Other Considerations. This section’s intent is to give the borrower a heads-up on some of the other features of the loan or loan process. The main considerations are to provide the borrower with information involving Appraisal, Assumption, Homeowner’s Insurance, Late Payments, Refinance considerations and Servicing.
Confirm Receipt:
The third and final section on page three is titled Confirm Receipt. This is where the borrower(s) sign the Loan Estimate to confirm they have received it. As prescribed by the Mortgage Disclosure Improvement Act (MDIA), it contains a statement of no obligation: “You do not have to accept this loan because you have signed or received this form.”
The Closing Disclosure
The Closing Disclosure (CD) is a five-page document containing the final amounts of all the costs involved in the transaction. It provides the final costs of the entire transaction. Think of it as the borrower’s receipt.
The CD is due 3 business days prior to consummation of the loan. Remember, consummation is different than closing so depending on the transaction (like a refinance on a primary residence) closing could actually take place 3 business days prior to consummation, in which case the CD could be provided at closing.
The borrower may request the CD 24 hours before consummation and many lenders will simply provide it as a courtesy to avoid any confusion.
The CD must be retained for 5 years from the date of consummation. If there are any errors on the CD, the MLO or lender has 30 days from the date of closing to correct the error.
If there are any numerical errors on the CD, the MLO or lender has 30 days from the date of closing to correct the errors. For non- numerical errors, the time frame is 60 days.
Creditors also must provide a corrected Closing Disclosure to correct non-numerical clerical errors and document cures for tolerance violations no later than 60 calendar days after consummation. Refunds due to tolerance errors must also be within 60 calendar days after consummation.
Closing Disclosure - Page One
On the very top of page one of the CD is the Closing Information, the Transaction Information, and the Loan Information. This is listed clearly at the top, so the borrower has a breakdown of many of the important features of the transaction.
One thing to note under Closing Information is that it may list the Sale Price, the Appraised Property Value, or the Estimated Property Value. What is listed depends on what type of transaction the loan is. If it is a purchase, then the Sale Price will be listed. If it is a refinance where an appraisal was done, then the Appraised Property Value will be used. If it is a refinance where no appraisal was obtained, then the Estimated Property Value can be used.
Loan Terms, Projected Payments And Costs At Closing:
The rest of page one breaks down to three sections: Loan Terms, Projected Payments, and Costs at Closing. The amounts and features listed here should be nearly identical to the LE. Some parts are more apt to change than others. An example of a common difference would be the Escrow amount increasing or decreasing from the estimate listed on the LE to the actual cost listed on the CD.
Closing Disclosure - Page Two
Page-two of the CD is a further breakdown and itemization of the information on page two of the LE. It contains two sections: Loan Costs and Other Costs. The CD goes further than the LE, because it shows who is paying what, and when the cost is
being paid. Loans Costs also has a subsection titled Services Borrower Did Shop For, which needs further explanation. If the borrower shopped for a service that was on the written List of Settlement Service Providers that the mortgage loan originator provided, it falls under the tolerances on the LE that we described earlier. Once again, the aggregate total of these costs should not increase by more than 10% of what was on the LE. But if a borrower uses a service not on this list, then the change in cost for these services from the LE to the CD can be any amount.
Other Costs:
Other Costs, as the name states, discusses some of the other costs a borrower will face in the loan interaction. These include costs such as taxes, insurance, home inspection fee, real estate commission, and title insurance.
Closing Disclosure - Page Three
On the top of page three of the CD is Calculating Cash to Close. This is a continuation of the Total Closing Costs and a further breakdown of the information on the previous page. Under the section Calculating Cash to Close is the subsection simply titled, Did this change? This is to help provide clarity to the borrower on what has or has not changed from the LE to the CD. If something has changed, it shows where to find and compare these figures. This helps both the originator and the borrower to see if these figures have stayed within the legal tolerances.
On the bottom half of page three of the CD is the section titled Summaries of Transactions. This is where the CD starts to break costs down much further than the LE, which does not contain all the information located here. This section of the CD also has two columns: Borrower’s Transaction and Seller’s Transaction. This section further shows what is due at closing. It provides clarity for all parties involved by showing who the funds are going to and who they need to come from. Some main items found here are seller concessions (i.e., seller credits) or other existing loans.
Closing Disclosure - Page Four
The header for this page and page five is Additional Information About This Loan. Page four has only one section, and it is titled Loan Disclosures. This is where a borrower can read about some of the main features their loan does or does not contain. Some of these features are a Demand Feature, Negative Amortization, or Assumption.
Another focus of this section is to highlight whether the borrower will have an escrow account and make the borrower aware their escrow payment may change in the future. A final disclosure found at the bottom of the page states matter-of-factly, “You may lose this property if you do not make your payments or satisfy other obligations for this loan.” This straight-forward
statement is another way the CD helps a borrower understand the responsibilities involved with financing a home.
