In the ongoing dog and pony show here's a review for your NMLS test
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After determining a consumer’s eligibility for
a loan and securing an appraisal of the property to secure it, a creditor/loan
originator should be prepared to provide a Closing Disclosure reflecting the
actual terms of the transaction (12 C.F.R. §1026.19(f)(1)(i)). This
disclosure is required for all closed-end lending transactions that are secured
by real property, except for reverse mortgage transactions.
When providing the Closing Disclosure,
creditors have a legal obligation to ensure that the consumer receives the
disclosure no less than three business days prior to consummation (12 C.F.R.
§1026.19(f)(1)(ii)(A)). A consumer’s receipt of a Closing Disclosure
three business days before consummation is intended to give him/her time to
review the actual loan costs before entering a binding contract to accept and
repay mortgage credit according to the terms of the lending agreement. If
a creditor mails the disclosure, the consumer is considered to have received it
three business days after its placement in the mail (12 C.F.R.
§1026.19(f)(1)(iii)). Direct delivery of a Closing Disclosure by courier or its
transmission via email allows creditors to begin counting the
three-business-day waiting period when the delivery is complete or when a
consumer transmits an email acknowledging receipt of an electronically
transmitted disclosure (Official Interpretations, 1026.19(f)(1)(iii)(2.)).
A new three-business-day waiting period between receipt of the
Closing Disclosure and consummation is required in the following circumstances:
·
The APR becomes
inaccurate
·
There is a change in
the loan product, or
·
The creditor adds a
prepayment penalty to the lending agreement
(12 C.F.R. §1026.19(f)(2)(ii))
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Changes that do not trigger a new waiting period are those that are related to non-numeric clerical errors (12 C.F.R. §1026.19(f)(2)(iv)). However, the official commentary suggests that a broader range of errors may trigger a new waiting period since triggering mistakes may include an error that affects other TRID Rule requirements. For example, the CFPB describes an incorrect address on a disclosure as an error that would trigger an additional waiting period since the wrong address could affect proper delivery of the disclosure (Official Interpretations, 1026.19(f)(2)(iv)).
When errors are clerical and corrections to the Closing
Disclosure do not trigger a new waiting period, the creditor must allow the
consumer to inspect the corrected disclosure during the business day
immediately preceding consummation and give a corrected disclosure to the
consumer at or before consummation (12 C.F.R. §1026.19(f)(2)(i)).
The TRID Rule allows
consumers to waive the three-business-day waiting period between receipt of a
Closing Disclosure and consummation when facing a bona fide personal financial emergency (12 C.F.R. §1026.19(f)(1)(iv)). The
requirements for waiving the waiting period are the same as those for waiving
the four-business-day waiting period between receipt of a Loan Estimate and
consummation. The request for a waiver must be a written request that
describes the financial emergency and that expressly waives the waiting period.
Signatures of all individuals who are primarily liable for the debt are
required, and the use of printed forms for waiver requests is prohibited.
The Closing Disclosure is longer than the Loan Estimate,
totaling five pages instead of three. Since it shows the actual costs of
a transaction, the Closing Disclosure includes details not found on the Loan
Estimate, and instead of summarizing costs and limiting information to entries
that will fit onto the model form, creditors may use additional pages if extra
space is needed to provide more details. The purpose of a Closing Disclosure is
to offer a consumer a statement of the actual costs associated with a residential
mortgage. When regulators examine a creditor’s loan files for TRID Rule
compliance, they will compare the actual costs of a transaction with the
estimated costs to determine whether variances in estimated and actual costs
are within the prescribed tolerances. If tolerances are exceeded and are
not remedied by a refund to the consumer, a violation of the requirement to
provide a good faith estimate of closing costs has occurred. There
are general rules for preparation of the Closing Disclosure, and they include
the following requirements:
·
Use
of the model form: creditors must
complete a Closing Disclosure using the form found in Appendix H-25 of
Regulation Z.
·
Rounding
of particular amounts: although
the Closing Disclosure lists exact fees for most of the amounts disclosed,
rounding to the nearest whole dollar is required when disclosing future
payments that may be impacted by events such as interest rate changes, negative
amortization, or the prepayment of a loan.
·
Disclosure
of percentages: when disclosing
the interest rate, points, and the percentage of payments that a borrower will
make towards interest over the loan term, creditors must disclose the
percentages using up to three decimal places.
·
Disclosure
of loan amount: the loan amount
is disclosed as an unrounded number, but if the loan amount is a whole number,
it must be truncated at the decimal point. For example, if a creditor is
lending a consumer $154,000.00, the amount is shown on the Closing Disclosure
as $154,000.
(12 C.F.R. §1026.38(t)(3), (4))
Although use of the model Closing Disclosure form is required,
limited alterations to the model form are allowed:
·
The model form
includes a reference to lender credits on the “Costs at Closing” table on page
1, but removal of the reference is permitted when a transaction does not
include lender credits
·
If there are not
enough lines on page 2 of the disclosure to show “Loan Costs” and “Other
Costs,” more lines may be added. If one page is not sufficient to show all of
these costs, additional pages are permitted as long as “Loan Costs” and “Other
Costs” are shown on separate pages.
(12 C.F.R. §1026.38(t)(5))
In preparing the
Closing Disclosure, creditors must ensure that they:
A.
Cross
out all non-applicable information
B.
Use
the model form found in Regulation Z
C.
Use
only black ink
D.
Round
all amounts to the nearest whole dollar
Page one of the Closing
Disclosure closely resembles the first page of the Loan Estimate. The
primary difference between the two disclosures is that the Loan Estimate rounds
the amounts shown as the “Estimated Total Monthly Payment” and “Costs at
Closing,” and the Closing Disclosure discloses these amounts in dollars and
cents.
The general information provided on the Closing Disclosure
includes some of the same information found on the Loan Estimate, such as the
identity of the loan applicant, the address for the property that he/she is
purchasing, and the loan type. In addition to this information, the Closing
Disclosure includes the date that loan funds will be disbursed, the name and
address of the seller, and identification of the attorney or title company that
is serving as the settlement agent for the transaction. Note that even though
the general information includes the lender’s name, it does not include the
lender’s address.
The Closing Disclosure also provides a mortgage insurance case
number, shown on the form as MIC#, which is used to identify the policy for
mortgage insurance.
In a transaction in which
the interest rate is locked and there is no change in the loan amount, the loan
terms shown on the Loan Estimate and the Closing Disclosure should be the same.
On both the Loan Estimate
and the Closing Disclosure, projected principal and interest payments are shown
in dollars and cents. The Loan Estimate uses rounded numbers to estimate
the cost of PMI and escrow payments, but on the Closing Disclosure, the exact
amounts for these costs are shown. “Costs at Closing” that are shown on the
Closing Disclosure are not rounded, but are shown in dollars and cents.
The Costs at Closing
section on page 1 of the Closing Disclosure is comprised of which two
subsections?
A.
Cash
to Close and Loan Costs
B.
Closing
Costs and Cash to Close
C.
Closing
Costs and Other Costs
D.
Loan
Costs and Other Costs
Like page 2 of the Loan Estimate, the second page of the Closing
Disclosure provides information on “Closing Cost Details,” which are itemized
under subsections A-J and divided between separate tables for “Loan Costs” and
“Other Costs.” Unlike the Loan Estimate, the Closing Disclosure provides these
numbers in dollars and cents.
Other details that only the Closing Disclosure offers are:
·
An indication of
whether a particular cost is paid by the borrower, paid by the seller, or paid
by others, and
·
An indication of whether
a cost is paid at or before closing
·
The format that the
Closing Disclosure uses to display closing costs is very different from the
format found on the Loan Estimate since it must accommodate this additional
information. Unlike the rules for completing the Loan Estimate, those for
completion of the Closing Disclosure permit creditors to add lines to the model
form and to use extra pages if the model form is not long enough to accommodate
a list of all of the costs related to a transaction.
·
Another detail that is
found only on the Closing Disclosure is the identification of the settlement
service providers that are ultimately receiving the payment for the services
performed for a particular transaction (12 C.F.R. §1026.38(f)(2), (3)).
Similarly, the table of “Other Costs” identifies the state or county that
assesses and receives payments for transfer taxes and property taxes (12 C.F.R.
§1026.38(g)(1)).
·
A Closing Disclosure
reflects a consumer’s choice of settlement service providers. As a result of
these choices, some services that were shown on the Loan Estimate as services
for which the consumer may shop will appear on the Closing Disclosure as
services for which the consumer did not shop.
·
Most consumers are
involved in very few residential mortgage transactions over the course of their
lives, and because they do not regularly conduct business with providers of
settlement services, they are likely to rely on the recommendations that
mortgage lenders offer on SSP lists. Use of a provider recommended by a creditor
determines whether the settlement service is shown on the Closing Disclosure
under “Services Borrower Did Not Shop For” or under “Services Borrower Did Shop
For.”
·
The TRID Rule states
that if a consumer is allowed to shop for a settlement service and selects a
provider included on the creditor’s SSP list, the Closing Disclosure must list
the service as one for which the consumer did not shop (12 C.F.R.
§1026.38(f)(2)). Conversely, if a consumer does not choose a service provider
included on an SSP list but chooses his/her own, then the consumer-selected
provider must be included on the Closing Disclosure as a provider of services
for which the consumer shopped (12 C.F.R. §1026.38(f)(3)).
·
As discussed in Module
1 of this course, a consumer’s choice of service providers also impacts the
tolerance levels for variances between estimated and actual charges. Based on
the reasoning that creditors should know the amounts charged by their
affiliates and by service providers that they recommend, the tolerances are
lower for affiliated and creditor-recommended providers. Creditors must
reevaluate the variances and the permitted tolerances after consumers select
their service providers.
As a reminder, these tolerances are:
·
0%: if a consumer chooses a provider that was
on the SSP list and that is also an affiliate of the creditor, the tolerance
limit is zero.
·
10%: if the service provider chosen by the
consumer was on the creditor’s SSP list but is not an affiliate, the tolerance
for variances between estimated and actual costs is 10%.
·
Unlimited
tolerance: if the provider
chosen by the consumer was not on the SSP list, there are no limitations on
variances between estimated and actual costs. Even if a consumer uses the
services of an affiliate, there are no tolerance limits if the service
performed is one that is not required by the lender. For example, if a consumer
decides to get an additional appraisal from an appraisal company that is
affiliated with the creditor and the extra appraisal is not required by the
creditor, variances between estimated and actual costs are not subject to
limitations.
(12 C.F.R. §1026.19(e)(3))
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Subsection D in the “Loan Costs” table only includes the origination fees and the settlement services that are designated as “Borrower-Paid” (12 C.F.R. §1026.38(f)(5)). Costs that are seller-paid or paid by others are not reflected in the subtotal. For example, the $1,000 fee for Allen’s closing attorney is not reflected in subsection D because LL Mortgage Company is paying it.
It is also worth noting that the credit report fee is not
disclosed in the “Loan Costs” table as a negative number, even though this cost
is typically paid prior to closing. Credit for this fee is given on page 3 of
the Closing Disclosure as an amount that was “Paid Already by or on Behalf of
Borrower at Closing.”
The “Other Costs” found in the “Closing Cost Details” are
included in subsections corresponding to those found on the Loan Estimate. These provisions limit
the cushion for escrow accounts to 1/6 of the annual property taxes and
homeowner’s insurance. She makes these calculations in compliance with
the provisions in RESPA and Regulation X that apply to escrow accounts (12
C.F.R. §1024.17).
“Other” costs listed in subsection H are fees that are not
charged by the creditor and not disclosed in any other section of the Closing
Disclosure. Examples that the CFPB cites in its official commentary
include all real estate brokerage fees, homeowner’s or condominium association
charges paid at consummation, home warranties, inspection fees, and other fees
that the creditor does not impose (Official Interpretations,
1026.38(g)(4)(1.)). As discussed in the review of the Loan Estimate, the cost of a
consumer’s title insurance policy is listed in Subsection H. Creditors do not
require borrowers to purchase an owner’s policy for title insurance, and a
parenthetical reference to owner’s title insurance as “optional” is required.
The calculations for determining the price of an owner’s title insurance policy
are the same calculations that are used to disclose this amount on the Loan
Estimate. The calculation is made by adding the full cost of an owner’s policy
to the discounted price of simultaneous lender’s coverage and then deducting
the full price of the lender’s policy:
$1,000
(owner’s full premium) + $250 (discounted cost for simultaneous lender policy)
= $1,250 $1,250 - $500 (full cost for lender policy) = $750
H and I of “Other Costs” by adding new information on
the cost of a home warranty policy that the seller has agreed to purchase
commission/ title owners optional
J
calculate
and disclose the “Total Closing Costs” shown in subsection J by adding the
“Total Loan Costs” to the “Total Other Costs” and subtracting lender credits.
The rules that determine which credits are shown as lender credits can be
challenging to understand, but in order to calculate the total closing costs
correctly, it is necessary to understand these rules. he TRID Rule includes extensive commentary on the disclosure of
lender credits. When lender credits are intended to apply to specific
charges, they are disclosed in the “Closing Cost Details” as a fee that is
“Paid by Others” and are listed on the same line as the charge that the lender
credit is intended to pay (Official Interpretations, 1026.38(f)(1.)). Use of
the notation “(L)” next to the amount disclosed indicates that the charge is
one that the lender is paying. For example, subsection B of Allen’s
disclosure indicates that the fee for a closing attorney is “(L) $1,000.00.”
When lender credits are a non-specific or
generalized credit, such as a credit to help a consumer with closing costs,
they are disclosed in subsection J of the “Closing Cost Details” as a lender
credit (Official Interpretations, 1026.38(h)(3)(1.)).
It is easy to be confused about the correct
way to disclose lender credits, and a factor that contributes to the confusion
is the use of different rules for disclosing lender credits on the Loan
Estimate and on the Closing Disclosure. On the Loan Estimate, both specific and
non-specific credits are added together and the total amount is disclosed as a
“Lender Credit” in subsection J of the “Closing Cost Details” (Official
Interpretations, 1026.19(e)(3)(i)(5.)). On the Closing Disclosure, a
distinction is made between specific lender credits, which are disclosed as a
cost that is “Paid by Others,” and general credits, which are listed in
subsection J under “Lender Credits.”
Creditors may use lender credits to refund consumers for charges
that exceed the variances permitted for differences between estimated and
actual costs. When using this method to address excess charges, the lender
credit must include a statement indicating that an increase in closing costs
exceeds legal limits by the dollar amount of the excess (Official Interpretations,
1026.38(i)(1)(iii)(A)(3.)). Disclosing and providing a refund for amounts that
exceed the established tolerances allows creditors to avoid liability for
failing to provide a good faith estimate of closing costs.
For example, assume that the SSP list that a creditor gives to a
loan applicant includes the name of an affiliated company for title services.
These services include a title search at an estimated cost of $900 and a
lender’s title insurance policy at an estimated cost of $500. The actual cost
for the title search is $1,200, and the lender’s policy costs $650. Because the
consumer chose an affiliated provider from the creditor’s SSP list, the
tolerance for variances between estimated and actual costs is zero, and in
order to comply with the TRID Rule, the creditor must offer the consumer a
refund of $450. The creditor would disclose this amount in subsection J of the
“Closing Cost Details,” with the amount and purpose of the credit stated, as
follows:
Lender Credits (includes $450 credit for
increase in closing costs above legal limit)
Page 3 of the Closing Disclosure shows consumers how
creditors calculate the amount of cash needed at closing. This page also
provides an overview of the transaction between a consumer who is financing the
purchase of a home and the seller, with space allocated for separate
disclosures of the borrower’s transaction and the seller’s transaction. The
third page of the disclosure includes a “Calculating Cash to Close” table that
provides side-by-side comparisons of estimated and actual closing costs. These
costs are divided into one column showing the “Loan Estimate” closing costs and
a second column showing the “Final” closing costs. The table’s third column
provides a space for a “Yes” or “No” statement that indicates whether the
estimated costs changed. These statements must be “more prominent” than the
other disclosures that are included on the table. The use of upper case letters
and bold font is required to ensure the prominence of this information
(Official Interpretations, 1026.38(i)(1.)).
The TRID Rule and its official commentary include guidance and
instructions for completing each entry on the table. The particular items
included on the table are outlined next.
The first amount disclosed on the “Calculating Cash to Close”
table is “Total Closing Costs.” This amount is the sum of the “Total Loan
Costs” and “Total Other Costs,” which is shown in subsection J on page 2 of the
Closing Disclosure. If an affirmative response indicates that the estimated
“Total Closing Costs” changed, the table must include a statement that directs
the consumer to the portion(s) of the Closing Disclosure where they can find an
itemization of actual fees.
The CFPB provides the example of an increase in an appraisal fee
that causes the total closing costs to increase. Since the appraisal fee is
found in the subtotal for “Loan Costs,” a statement in the closing cost table
must direct the consumer to “See Total Loan Costs (D).” However, if the change
in total closing costs is attributed to increased charges for property taxes,
transfer taxes, or other items that are disclosed as “Other Costs,” a statement
should advise the consumer to “See Total Other Costs (I).” If an increase in
total closing costs is attributed to changes in both loan costs and other
costs, the narrative text should instruct consumers to “See Total Loan Costs
(D) and Total Other Costs (I)” (Official Interpretations,
1026.38(e)(2)(iii)(A)(1.)).
Often, the only closing cost that is paid prior to closing is
the fee for a credit report. While this fee is disclosed as a negative
number in the column for “Final” costs, it is always shown in the “Loan
Estimate” column of the table as $0 because an estimate of such amount is not
disclosed on the Loan Estimate (Official Interpretations,
1026.38(e)(3)(iii)(B)). In transactions in which a consumer is financing a
portion of the closing costs, a disclosure of the amount financed is included
in the table. In a purchase transaction, the down payment is the difference
between a home’s purchase price and the loan amount.
Amounts
disclosed as “Funds from Borrower” are not relevant in home purchase
transactions. This disclosure applies to transactions in which proceeds from a
home loan are used to pay off debt. The amount disclosed as “Funds from Borrower”
is calculated by subtracting the principal amount of the credit extended from
the total amount of all existing debt being satisfied in the real estate
closing. Any amount disbursed to a consumer from the proceeds of a home loan is
disclosed in the table as “Funds for Borrower” (12 C.F.R.
§1026.38(i)(6)(iii)(C)). The TRID Rule requires
disclosure of the deposit or earnest money that a consumer pays in transactions
to purchase a home. If the homebuyer is not paying a deposit, the columns
next to this item must show an entry of $0. Showing $0 in the columns is
also required in all transactions other than purchase transactions (12 C.F.R.
§1026.38(i)(5)). For example, if a transaction involves a refinance, the
amounts shown in the “Loan Estimate” and “Final” columns in the “Calculating
Cash to Close” table will be $0. The seller credits that are disclosed on the
Closing Disclosure’s “Calculating Cash to Close” table are funds given by the
seller to the consumer for closing costs. These amounts are distinguished
from itemized amounts for specific charges that are shown as “Seller-Paid” on
page 2 of the Closing Disclosure (12 C.F.R. § 1026.38(j)(2)(v)). The
official commentary is very helpful in determining the amounts that are shown
as “Adjustments and Other Credits” on the Closing Disclosure. The examples that
it provides include:
·
Prorated taxes or
homeowner’s association fees
·
Utilities that the
seller used but did not pay for
·
Rent that the seller
collected for a period that extends beyond the date of closing or consummation
·
Interest on loan
assumptions
Amounts included in the table also include generalized credits
towards closing costs given by parties other than the seller (Official
Interpretations, 1026.38(i)(8)). This may include gifts from others, such as
the gift money that Allen received from his mother. Specific credits from
parties other than the seller or creditor are shown as “Paid by Others” on page
2 of the Closing Disclosure.
The final items in the “Calculating Cash to Close” table are
totals for the cash to close that were shown on the Loan Estimate and the
actual or “Final” total that includes seller credits and other adjustments. The
remainder of page 3 of the Closing Disclosure provides information on the real
estate transaction between a homebuyer and a home seller. There are
numerous rules related to the disclosures found in this section, and there is
more than one way to achieve regulatory compliance. The
“Summaries of Transactions” shows two tables: one for the borrower’s
transaction, and one for the seller’s. The presentation of this information
raises a number of obvious questions:
·
In transactions
involving a seller, does the TRID Rule require the offer of a Closing
Disclosure to the seller, and if so, when is it due?
·
What entity or individual
is responsible for providing a Closing Disclosure to the seller?
·
Is the seller
permitted to see all of the borrower’s information on the Closing Disclosure?
·
Must the seller
receive the same version of the Closing Disclosure that is provided to a consumer?
·
If a separate
disclosure for sellers is permitted, may the creditor or the consumer receive a
copy of it?
The TRID Rule answers these questions, stating that in a
transaction that involves a seller, the settlement agent must provide the
seller with disclosures found in the Closing Disclosure that relate to the
seller’s transaction (12 C.F.R. § 1026.19(f)(4)(i)). The deadline for providing
a Closing Disclosure to a seller is no later than the day of consummation (12
C.F.R. §1026.19(f)(4)(ii)).
The Closing Disclosure that a seller receives does not include
information on the borrower’s transaction for a loan. Therefore, many sections
of the disclosure that is offered to a seller are left blank.
The omitted information includes:
·
Information related to
the creditor’s identity and its contact information
·
Descriptions of the
loan product and loan term
·
The loan terms,
projected payments, and costs at closing
·
The amount of cash to
close
·
Loan calculations,
including the total payments, finance charge, amount financed, APR, and total
interest percentage
(12 C.F.R. §1026.38(t)(5)(v))
With so much information omitted from the Closing Disclosure
that is given to the seller, the CFPB created a modified form that is more
practical. This modified Closing Disclosure is located in Appendix H-25(I) of
Regulation Z. The two-page modified disclosure summarizes the seller’s
transaction, provides contact information for the real estate broker involved
in the transaction, and lists any “Loan Costs” or “Seller Costs” that are
seller-paid.
Despite the separation of seller and consumer information,
disclosures related to seller credits and to seller-paid “Loan Costs” and
“Other Costs” must remain on the Closing Disclosure that is provided to a
consumer.
The settlement agent
must provide disclosures that relate to the seller's transaction to the seller
no later than:
A.
Seven
days prior to consummation
B.
Five
days following consummation
C.
Three
business days prior to consummation
D.
The
day of consummation
Like
the Loan Estimate, the Closing Disclosure provides additional disclosures that
were formerly offered as separate disclosures. These include “Loan
Disclosures” on page 4, which address particular loan features, and “Other
Disclosures” on page 5, that offer more general information. The “Loan
Disclosures” on page 4 allow loan originators to check boxes that indicate
whether a loan has any of the following provisions and features. The “Loan
Disclosures” on page 4 allow loan originators to check boxes that indicate
whether a loan has any of the following provisions and features. Negative Amortization (Increase in Loan Amount):negative amortization
loans and payment-option loans allow borrowers to pay less than the full amount
of interest due and permit creditors to add unpaid interest to a loan’s
principal balance.
This type of repayment program was used during
the early 2000s as a means of making loan payments affordable during the early
years of a loan’s term. These products were available prior to 2007 when
rapidly-rising home prices and easy access to mortgage credit lured
underqualified consumers into the housing market. The willingness of creditors
to make these loans was based on the premise that home equity would rapidly
grow as home prices rose, giving borrowers the opportunity to refinance these
risky loan products with more traditional mortgages.
Today, negative amortization and payment-option
loans are only available to exceptionally well-qualified borrowers. Regulation
Z’s Ability to Repay Rule prohibits creditors from offering a consumer this
type of loan unless the consumer can demonstrate the ability to make amortizing
payments at the loan’s fully-indexed interest rate (12 C.F.R. §1026.43(c)(5)).
With these restrictions in place, it is no longer possible to make loan
payments more affordable with a negative amortization feature.
The Closing Disclosure must
indicate whether a mortgage has a repayment program or payment option that can
result in negative amortization. It includes three boxes, and the loan
originator should check the appropriate one to indicate whether negative
amortization will occur, may occur, or will not occur. The Ability to Repay
Rule and the Qualified Mortgage Rule include numerous requirements for
transactions involving negative amortization loans, and if a loan allows
negative amortization to occur, the loan originator must take steps to ensure
that all of these requirements are met.
Partial Payments: different creditors have
different policies regarding partial loan payments. When lenders or servicers
allow partial payments, Regulation Z states that they may handle them in one of
three ways: they may apply the partial payment to the loan balance, return the
payment, or place the payment in an unapplied funds account where it will
remain until the borrower makes additional payment(s) until the amount required
for a regular periodic payment is accumulated (Official Interpretations,
1026.36(c)(1)(ii)).
The Closing Disclosure must include a statement indicating
whether the lender will accept partial payments and how it will handle them (12
C.F.R. §1026.38(l)(5)). The language on the disclosure reflects the options for
partial payments found in Section 1026.36 of Regulation Z, and gives the
creditor the opportunity to check a box showing that partial payments are:
·
Applied to the loan
balance
·
Held in a separate
account until the remainder of the payment is made, or
·
Not accepted
The disclosure also warns that if the loan is sold, the new
holder of the consumer’s mortgage debt may have a different policy regarding
partial payments.
Security Interest: mortgages are secured debt, and a
disclosure on page 4 helps consumers understand that their homes serve as
security for their mortgage debt. The Closing Disclosure must state the address
of the home that will secure a mortgage and include the following statement: “You
may lose this property if you do not make your payments or satisfy other
obligations for this loan.”
This statement gives originators an opportunity to explain how a
consumer’s failure to meet “other obligations,” such as the payment of property
taxes or insurance, may lead to the loss of a home. A quick review of this
disclosure is an effective way to initiate a discussion about escrow accounts
and to explain how they help to ensure that a borrower has funds set aside to
meet the other financial obligations that come with having a mortgage.
The Closing Disclosure includes separate disclosures for
consumers who will have an escrow account and for consumers who will not. The
disclosures for borrowers who are required to have an escrow account include:
·
A statement that
escrow accounts are also known as impound or trust accounts
·
A statement that the
creditor may be subject to penalties if it fails to make required payments from
the escrow account
·
A statement that,
without an escrow account, the consumer would be required to make direct
payments for property taxes and insurance
·
A table that shows:
o The amounts that must be paid into the escrow
account during the loan’s first year
o The estimated amounts that will be due for
non-escrowed items during the loan’s first year
o The amount of the initial escrow payment due
at closing, with a reference to the fact that this amount is used to establish
a cushion for account shortages
(12 C.F.R. §1026.38(l)(7)(i)(A))
For consumers who will not have an escrow account, the
disclosure includes the following information:
·
An explanation of the
reason for not establishing an escrow account
·
A statement that the
consumer must make direct payments for property taxes and insurance
·
A statement that the
consumer may ask the creditor about establishing an escrow account
·
A table showing:
o The estimated amount that the consumer will
pay for property taxes during the first year of the loan term, with a warning
that the consumer may be required to pay the taxes in one or two large payments
o Any fee that the creditor may impose as an
“Escrow Waiver Fee”
(12 C.F.R. §1026.38(l)(7)(i)(B))
Page 4 of the Closing
Disclosure contains information for borrowers who are required to have an
escrow account, including all of the following statements, except:
A.
The
consumer must make direct payments for property taxes and insurance
B.
Escrow
accounts are also known as impound or trust accounts
C.
Without
an escrow account, the consumer would be required to make direct payments for
property taxes and insurance
D.
The
creditor may be subject to penalties if it fails to make required payments from
the escrow account
Under the heading “In the future,” the Closing Disclosure warns
consumers that changes in property taxes may lead to a change in the amount of
the escrow payments that are due. This disclosure also advises consumers that:
·
Future cancellation of
an escrow account is possible, but will mean that the consumer must make direct
payments for property taxes and insurance
·
Failure to pay
property taxes and insurance has consequences that include legal actions by
state and/or federal government, imposition of a requirement to establish a new
escrow account, and force-placed insurance
(12 C.F.R. §1026.38(l)(7)(ii)
Page 5 provides a breakdown of total loan costs, additional
disclosures, and information that the consumer may use to contact other
participants in a transaction, including the lender and settlement agent.
For transactions that involve the sale of a home, contact information for
the real estate broker is also included. “Loan Calculations” table
on page 5 shows cumulative loan costs over a loan’s term. The “Total of
Payments” and the “Total Interest Percentage” are calculated using the same
methods used to compute these amounts for the “Comparisons” table on the Loan
Estimate. However, the “Total of Payments” shown on the Closing Disclosure is
calculated over the full term of the loan and is not limited to payments made
over five years (Official Interpretations, 1026.38(o)(1)).
Calculation of the “Finance Charge” is completed following the
requirements of Section 1026.4 of Regulation Z and is disclosed as a total
amount.
For guidance in
determining the “Amount Financed,” the TRID Rule directs creditors to Section
1026.18 of Regulation Z (Official Interpretations, 1026.38(o)(3)). These
regulations define the amount financed as the net amount of
credit extended (Official Interpretations, 1026.18(b)). Three numbers are used
to calculate the amount financed:
·
The principal loan
amount
·
Other amounts that are
financed but not included in the finance charge, such as settlement fees paid
to a provider that is not affiliated with the creditor or fees for optional
credit life or credit disability insurance
·
Any prepaid finance
charges that are paid by cash or with a check
Using these three numbers, the amount financed is calculated as
follows:
(Principal Loan Amount) + (Financed Items) –
(Prepaid Finance Charges) = (Amount Financed)
Page 5 of the
Closing Disclosure provides general disclosures Appraisal: the
Closing Disclosure reminds consumers that a creditor must provide them with a
copy of the appraisal of the property used to secure a loan and that the
appraisal copy, which is due at least three business days prior to closing, is
provided at no additional cost. This disclosure, like the appraisal-related
disclosure in the Loan Estimate, satisfies notice requirements that ECOA and
Regulation B create for first-lien transactions and that Regulation Z creates
for higher-priced mortgage loans.
Contract Details: this disclosure instructs consumers to
refer to their lending agreements to understand the nature and consequences of
default, the circumstances in which a creditor may demand early repayment of a
loan’s balance, and situations in which a creditor may impose prepayment
penalties.
Liability after
Foreclosure: millions of
homes were lost to foreclosure in the years following the economic crisis that
began in 2007. These foreclosures resulted from the purchase of homes at
inflated prices during the early 2000s when home values were skyrocketing.
Others resulted from home equity loans that were extended on the basis of
inflated property appraisals. When the housing market crashed and was flooded
with a massive inventory of overvalued properties, both borrowers and lenders
sustained huge financial losses. Lenders tried to recover unpaid loan balances
by filing actions in court for deficiency judgments. Some states tried to
protect consumers with the adoption of anti-deficiency laws. These laws
prohibit first-lien creditors from seeking to recover the difference between an
outstanding loan balance and the amount secured from a foreclosure sale.
Usually, the protection of anti-deficiency laws is limited to consumers who
have lost their primary residence in a foreclosure action.
The fifth page of the Closing Disclosure includes a statement
about potential liability for an unpaid loan balance in the event that a
foreclosure occurs. Loan originators will need to know whether the applicable
state law permits or prohibits deficiency judgments so that they can check the
correct statement regarding liability after foreclosure.
Refinance: like the Loan Estimate, the Closing
Disclosure includes a statement advising consumers that the future refinancing
of a mortgage is not guaranteed and will depend on factors that include a
borrower’s eligibility for a new loan, valuation of the property securing the
loan, and market conditions.
Tax Deductions: the Internal Revenue Service has numerous rules on the
deduction of interest paid on a mortgage loan. A disclosure on page 5 warns
consumers that they cannot deduct interest payments if a loan’s balance is
greater than the value of the home securing the loan. This disclosure also
advises consumers to consult with a tax advisor The Closing Disclosure
must provide a street address, email address, and phone number for each of the
participants in a lending transaction, including the lender, mortgage broker,
real estate broker, and settlement agent. Generally, the TRID Rule does
not permit modifications of the model form, and if participants listed on the
form are not involved in a particular transaction, the spaces next to these
providers should be left blank. Use of the phrase “not applicable” or the
designation “N/A” is not permitted.
Despite the general rule against alterations
of the disclosure form, the CFPB’s official commentary states that creditors
and originators can make minor changes to the table containing contact information.
When space is needed to list additional participants, they can omit
unused columns to create space for listing relevant participants. For
example, if a transaction involves two real estate brokers, but no mortgage
broker, the mortgage broker column may be eliminated in order to accommodate
information for both real estate brokers. The use of a separate page to
add additional contact information that will not fit on the model form is also
permitted when the space provided on the Closing Disclosure is insufficient
(Official Interpretations, 1026.38(r)(1.)).
When completing the table of contact information, legal names of
participants are required. However, abbreviations are allowed when they are
sufficient to allow a consumer to identify the entity named. For example, in
the fictitious lending transaction, the loan originator may identify LL
Mortgage Company as LL Mortgage Co., but use of an abbreviation such as LLMC
would probably not be permitted (Official Interpretations, 1026.38(r)(2.)).
The “Contact” listed on the form must be the individual who
interacts most frequently with the consumer and who has an NMLS unique
identifier (Official Interpretations, 1026.38(r)(6.)). The address for natural
persons such as loan originators must be the address of the location where they
are employed rather than a general corporate headquarters address (Official
Interpretations, 1026.38(r)(3.)).
The listing of NMLS numbers is required for all participants in
a transaction. If the entity or individual does not have an NMLS number, the
license ID number provided by the state regulatory or licensing authority must
be provided.
A separate block of information instructs consumers to use
the listed contacts to obtain additional information about the loan or to
contact the CFPB with questions or complaints. This block of information
is designated with a “prominent question mark” that must be “substantially
similar” in size and location to the question mark shown on the model
disclosure. Creditors are not required to confirm a loan applicant’s receipt of
a Closing Disclosure with a signature, but if they request one, they must
include the following statement above the signature line: “By
signing, you are only confirming that you have received this form. You do not
have to accept this loan because you have signed or received this form” (12 C.F.R. §1026.38(s)(1)). If no signature is
required, the Closing Disclosure must include an additional entry under “Other
Disclosures” which states that receiving a disclosure and signing a loan
application do not constitute an obligation to accept the loan that the
creditor offers. Most loan originators are painfully familiar with the problems
that delay closings, even after closing dates are set and Closing Disclosures
are delivered. Common obstacles include:
·
Discovering that a
title is not clear
·
Findings during a home
inspection or a final walk-through that signal problems in the transaction
between the homebuyer and the seller
·
Errors in closing
documents, ranging from misspelled names of the parties to inaccurately
disclosed loan costs
·
Unexpected problems
with the valuation of the real estate that will secure the mortgage
·
Last-minute requests
by loan applicants or sellers
Any of these problems is likely to cause delays in bringing a loan
applicant and a lender to the closing table. When a rate-lock period is winding
down, delays become matters of increasing concern. If a Closing Disclosure
becomes inaccurate due to factors such as an expired rate-lock, the need for
revised disclosures arises once again.
The TRID Rule requires corrections to Closing Disclosures after
the consummation of a loan. The corrections are required for:
·
Inaccuracies related
to post-consummation events
·
Clerical errors
·
Payment of refunds
The regulatory requirements for making these post-consummation
corrections to closing disclosures are discussed in the following paragraphs.
The requirement to correct inaccuracies related to a
post-consummation event only applies when the event:
·
Occurs within 30
days after consummation
·
Creates an inaccuracy
in the Closing Disclosure, and
·
Causes a change in the
amount “actually paid” by the borrower or paid by the seller
When each of these
three requirements for delivering a post-consummation Closing Disclosure is
met, a corrected disclosure is due no later than 30 days after
obtaining information that establishes the inaccuracy (12 C.F.R.
§1026.19(f)(2)(iii)).
A review of the preamble to the TRID Rule and the CFPB’s
official commentary shows that the “events” that trigger post-consummation
disclosures involve the discovery of information which reveals an inaccuracy on
the final disclosures. For example, during the rulemaking proceedings,
participants from both the primary and secondary mortgage markets reported that
many recorder’s offices have a backlog of work that delays the recording of
deeds and mortgages for several months (78 Fed. Reg. 79880). In these
circumstances, learning that the exact amount of a recording fee does not match
the amount that a consumer “actually paid” is an “event” that will necessitate
a revised Closing Disclosure.
Despite evidence that the exact amount of some
fees, such as recording fees, may not be known with certainty until more than
30 days after consummation, the CFPB did not extend the period of time for
providing corrected post-consummation disclosures beyond 30 days.
However, as discussed in a subsequent section, if the discovery of an
inaccurate cost disclosure necessitates a refund to the borrower, a revised
Closing Disclosure is also required.
However, as discussed
in a subsequent section, if the discovery of an inaccurate cost disclosure
necessitates a refund to the borrower, a revised Closing Disclosure is also
required.
When a transaction involves a seller, and
information identified after consummation shows that the amount actually paid
by the seller was not the amount shown on the Closing Disclosure, the
settlement agent (not the creditor) must send the seller a corrected disclosure
within 30 days of discovering the error (12 C.F.R. §1026.19(f)(4)(ii)).
The CFPB cites the example of a transaction in which the seller agrees to pay a
nuisance abatement assessment that was not included on the Closing Disclosure.
The settlement agent must revise the Closing Disclosure and deliver or
mail the corrected disclosure no later than 30 days after discovering the
inaccuracy.
Creditors have 60 days to correct non-numeric clerical errors on Closing
Disclosures. When non-numeric clerical errors are corrected within 60
days of consummation, there is no violation of the requirement to provide a
Closing Disclosure that shows the actual terms of a transaction (12 C.F.R.
§1026.19(f)(2)(iv)). If a consumer pays more for closing costs than the amount
stated in the Loan Estimate, and if this amount exceeds permitted tolerances,
the creditor is not in violation of the requirements to provide a Loan Estimate
with a good faith estimate of costs and to provide a Closing Disclosure with a
statement of actual costs if it:
·
Refunds the excess
amounts paid no later than 60 days after consummation, and
·
Delivers or mails a
corrected Closing Disclosure no later than 60 days after
consummation (this corrected disclosure will disclose the refund amount as a
“Lender Credit,” followed by a statement that the amount is a credit for an
increase in closing costs above the legal limit)
(12 C.F.R. §1026.19(f)(2)(v))
The need to provide a refund is most likely to occur when the
inaccurate fee is for an amount that is subject to a zero tolerance for
variances between estimated and actual costs. For example, no variance is
allowed for differences between estimated and actual costs for transfer taxes.
The ability to correct an inaccurate disclosure of estimated costs with refunds
and the ability to correct an inaccurate disclosure of actual costs with a
corrected Closing Disclosure is a good reason for creditors to conduct
post-closing reviews of loan files. With 60 days to provide refunds and send
corrected disclosures, creditors have a reasonable opportunity to identify
mistakes and correct
In order to avoid
liability if a consumer pays closing costs in excess of the permitted
tolerances, a creditor must refund the excess amount and deliver a corrected
Closing Disclosure within:
A.
45
days of realizing excess costs were paid
B.
30
days of consummation
C.
60
days of consummation
D.
10
days of realizing excess costs were paid
E.
The first page of
Allen’s Closing Disclosure contains an entry next to MIC#, which is the:
A.
Mortgage
insurance case number
B.
Mortgage
interest closing number
C.
Monthly
increased costs number
D.
Monthly
initial charge number
Which of the following
is included in the Loan Terms section of Allen’s Closing Disclosure?
A.
Loan
product
B.
Loan
purpose
C.
Loan
type
D.
Loan
amount
Why was the pest
inspection fee on Allen’s Closing Disclosure not subject to any tolerance
limits?
A.
LL
Mortgage Company chose the provider
B.
Allen
chose the provider
C.
Pest
inspection fees are not subject to tolerance limits
D.
The
provider was not affiliated with LL Mortgag
Because Allen was
allowed to shop for a home inspector and chose an unaffiliated provider that
was named on the SSP list, the home inspection fees were subject to a:
A.
Zero
tolerance
B.
5%
tolerance
C.
25%
tolerance
D.
10%
tolerance
Information excluded
from the seller’s version of the Closing Disclosure includes:
A.
The
name of the borrower
B.
A
description of the loan product
C.
The
name of the real estate broker
D.
The
total due to the seller at closing
A Closing Disclosure
is required for all closed-end lending transactions that are secured by real
property, except for:
A.
Reverse
mortgages
B.
Refinances
C.
Purchases
D.
Adjustable-rate
mortgages
A creditor must ensure
a consumer receives the Closing Disclosure no less than ______ business days
prior to consummation.
A.
Three
B.
Seven
C.
Four
D.
Ten
Total Closing Costs
shown in subsection J of page 2 of the Closing Disclosure are calculated by
adding the Total Loan Costs to the Total Other Costs and subtracting:
A.
Costs
paid outside closing
B.
Lender
credits
C.
Insurance
charges
D.
Origination
charges
Before the CFPB created single integrated disclosures for
estimated and final closing costs, the rules for disclosing loan costs were
divided between Regulations X and Z. When the CFPB rewrote these rules, it
consolidated RESPA and TILA disclosure requirements in the TRID Rule, which is
located in Regulation Z.
Although the disclosure rules found in Regulation X no longer
apply to closed-end loans, they are still relevant to transactions for reverse
mortgages.
In reverse mortgage transactions, loan originators must continue
to disclose settlement cost estimates on a Good Faith Estimate (GFE) and actual
costs on a HUD-1 Settlement Statement. A review of RESPA’s disclosure
requirements is beyond the scope of this course, but one topic that is
addressed is the ability of loan originators to issue a revised GFE.
There are similarities between RESPA’s rules for revising GFEs
and TRID’s rules for revising Loan Estimates. For both, there are permitted
tolerances for differences between actual and estimated costs and limited
circumstances in which changes to estimated costs are permitted. Following is a
review of RESPA’s tolerances and rules for revising GFEs.
Changes between estimated and actual charges are prohibited for:
·
Origination charges
·
Charges for locking an
interest rate, and
·
Transfer taxes
There is a 10% tolerance
for differences between the total amount of actual and estimated charges
permitted for:
·
Lender-required
settlement services performed by a provider chosen by the lender
·
Lender-required
services and title and insurance services if the loan applicant uses a provider
recommended by the lender, and
·
Recording fees
Estimates for other settlement services are not subject to a
tolerance limit and may change (12 C.F.R. §1024.7(e)).
Revised GFEs are permitted in the following circumstances:
·
Changed
circumstances affecting settlement charges:if changed circumstances cause the amounts stated on the GFE to
exceed permitted tolerances, the creditor may issue a revised GFE. Changed
circumstances include:
o Acts of God, war, and other emergencies
o Changes to or inaccuracies in information the
lender relied on when preparing the GFE
o New information about the borrower or the
transaction
·
Changed
circumstances affecting the loan: changed circumstances affecting eligibility may include
events that impact a consumer’s eligibility for a mortgage, such as loss of
employment
·
Borrower-requested
changes: revisions to the
GFE are permitted when borrower-requested changes actually result in an
increase in estimated costs
·
Expiration
of the GFE: like Loan
Estimates, GFEs have a 10-day expiration period, unless the parties to a
transaction agree to a longer period for the loan applicant to indicate an
intent to proceed
·
Interest
rate-dependent changes: if
a loan applicant has not locked the interest rate or if a locked rate expires,
a revised GFE showing loan terms related to the interest rate is permitted
(12 C.F.R. §1024.7(f))
When providing a
revised GFE, there is a 10% tolerance for differences between the total amount
of actual and estimated charges permitted for:
A.
Recording
fees
B.
Charges
for locking an interest rate
C.
Origination
charges
D.
Transfer
taxes
The _________ is a
measure of the cost of credit, expressed as a yearly rate.
A.
Annual
percentage rate
B.
Loan
amount
C.
Simple
rate of interest
D.
Finance
charge
The _________ is the
cost of credit as a dollar amount.
A.
Finance
charge
B.
Simple
rate of interest
C.
Annual
percentage rate
D.
Loan
amount
Which of the following
fees would be included in the finance charge?
A.
Appraisal
fee
B.
Credit
report fee
C.
Loan
origination fee
D.
Title
insurance fee
Advertising a minimum
periodic payment triggers the requirement to include a statement, if
applicable, that which of the following may result?
A.
A
balloon payment
B.
Default
C.
A
prepayment penalty
D.
Negative
amortization
It is permissible for
a lender to include which of the following in an advertisement?
A.
A
reference that the lender may serve as the borrower’s counselor
B.
A
claim that a particular loan product will result in total debt elimination
C.
Information
about a loan product that is available to reasonably qualified applicants
D.
Language
that the lender is endorsed by the government when it is not
The Gramm-Leach-Bliley Act (GLB Act) is
a federal law that recognizes that each financial institution has “an
affirmative and continuing obligation to respect the privacy of its customers
and to protect the security and confidentiality of those customers’ nonpublic
personal information” (15 U.S.C. §6801(a)). Regulation P,
which implements the GLB Act, defines nonpublic personal information as
personally identifiable financial information that is not publicly available
(12 C.F.R. §1016.3(p)).
The GLB Act applies to a broad range of
financial institutions that provide financial products and services, but this
course will review provisions strictly within the context of mortgage lending
transactions.
The GLB Act protects the privacy of nonpublic
personal information that is provided by individual “consumers” and
“customers,” and extends the highest level of protection to customers. In home
loan transactions, a consumer becomes the customer of a mortgage lender or
broker when he/she enters into an agreement in which the lender or broker
agrees to arrange or broker a mortgage loan for the borrower (12 C.F.R.
§1016.3(j)(2)(i)(F)).
When a customer
relationship is established with a loan applicant, the first requirement under
the GLB Act is to provide the applicant with a “clear and conspicuous notice”
that describes the lender’s or broker’s privacy policies and practices. This
initial privacy notice is due at the time that a customer relationship is
established. Generally, a consumer who is shopping for a mortgage establishes a
customer relationship with a lender or broker when submitting a loan
application.
There is an exception to the timing requirement for providing an initial privacy notice when:
There is an exception to the timing requirement for providing an initial privacy notice when:
·
Providing a privacy
notice at the time that the customer relationship is established would
“substantially delay” the transaction, and
·
The customer agrees to
receive the notice at a later time
When a loan applicant
agrees to avoid transaction delays by receiving an initial notice at a later
time, the notice is due within a reasonable time. Note, however, that if a
customer relationship is established face-to-face or online, loan originators
must provide an initial notice immediately, since offering it in these
circumstances would not delay the transaction (12 C.F.R. §1016.4).
Any mortgage lender or broker that intends to disclose nonpublic
personal information to nonaffiliated third parties must offer an opt-out
notice with the initial privacy notice. The opt-out notice must include a
description of the type of information that the financial institution may disclose
and a “reasonable means” for opting out. Consumers may exercise their
right to opt out by:
·
Calling a toll-free
number or mailing an opt-out form within 30 days of the date
that the opt-out notice was mailed, or
·
Opting out
electronically within 30 days of receiving privacy notices
online
(12 C.F.R. §1016.10(a)(3))
If a financial institution revises its privacy policy, it must
issue a revised privacy notice that includes a new opt-out notice and a
reasonable opportunity to opt out. For example, if a lender issued an initial
privacy policy describing particular nonaffiliated parties with which it
intends to share personal information and subsequently decides to share
information with a third party that was not described in the original notice,
it must issue a new notice to its customers before sharing the information (12
C.F.R. §1016.8).
Regulation P does not require mortgage lenders and brokers to
provide opt-out notices when giving consumers’ personal information to third
party settlement service providers which is used to provide services requested
or authorized by the consumer (12 C.F.R. §1016.14(a)(1)). There are a number of
times during a lending transaction when a loan originator will provide personal
information to third parties. For example, a loan originator must give a
customer’s Social Security number to a consumer reporting agency in order to
obtain a credit score, and if a lender uses a third party for underwriting, it
will pass on all of the information contained in a loan application.
Mortgage lenders and brokers must conduct due diligence to
determine that the third party service providers on which they rely are using
appropriate measures to protect the privacy and confidentiality of personal
information. The failure to conduct due diligence can lead to liability if a
third party provider releases a customer’s personal information.
Lenders are relieved of the obligation to provide privacy
notices when:
·
Selling the servicing
rights to a mortgage, and
·
Selling a loan in the
secondary mortgage market
(12 C.F.R. §1016.14(a))
Regulation P includes a “special rule for loans” that states
that the customer relationship transfers with the servicing rights when
servicing rights are transferred to another lender or loan servicer (12 C.F.R.
§1016.4(c)(2)).
There are five elements that a security program must include in
order to comply with the Safeguards Rule. These include:
·
Designating an
employee or employees to coordinate the security program
·
Identifying reasonably
foreseeable internal and external risks to security
·
Designing,
implementing, and testing security programs
·
Overseeing third party
service providers by ensuring that they are able to safeguard the privacy and
confidentiality of consumer information, and entering contractual agreements
for them to maintain appropriate safeguards, and
·
Evaluating and
adjusting security programs to address any changes that may have a material
impact on the effectiveness of the programs
(16 C.F.R. §314.4)
In addition to integrating these five elements into a security
program, financial institutions must implement specific safeguards that are
appropriate to their size and complexity, the nature and scope of their
activities, and the sensitivity of customer information they maintain (16
C.F.R. §314.3(a)).
n 2003, Congress
readdressed the protection of personal information when it directed federal
regulators to adopt rules for the safe disposal of personal information that is
derived from consumer reports, such as credit reports (15 U.S.C. §1681w).
Congress included this directive in the Fair and Accurate Credit Transactions
Act (FACTA), and the FTC and other regulators responded with their promulgation
of the FACTA Disposal Rule.
Activities that are subject to the Disposal Rule are not limited
to the discarding of information. The Rule also applies to the sale or transfer
of computer equipment, upon which consumer information is stored (16 C.F.R.
682.1(c)(2)).
resources
on IdentityTheft.gov, which is maintained by the FTC. Consumers have ethical
and legal obligations to provide truthful and accurate information on identity
theft reports, and may face criminal penalties for filing false information (15
U.S.C. §1681a(q)(4)(C)).
Congress enacted ECOA in October 1974, the law focused solely
on gender-based discrimination. amending ECOA in 1976 to prohibit
discrimination on the basis of race, color, religion, national origin, age,
receipt of public assistance income, or the good-faith exercise of rights under
the Consumer Credit Protection Act. In addition to extending the scope of ECOA,
the 1976 amendments strengthened the law by adding a provision that authorized
the Attorney General to bring an action to address a pattern or ongoing
practice of discrimination. Home Mortgage Disclosure Act.
The primary purpose of HMDA is to ensure that all creditworthy consumers have
equal access to mortgage credit.
When enacted, HMDA responded to another need that became
apparent during the Congressional hearings related to ECOA. Most of the
testimony about creditors’ discrimination against women was anecdotal because
creditors were not required to collect data on the personal characteristics of
individuals whose loan applications were approved or denied. As discussed in a
later section of this course, HMDA requires the collection of data so that
federal regulators can make a fact-based determination of whether lenders are
conducting business in compliance with ECOA and other fair lending laws.
ECOA include those against:
·
Disparate treatment
·
Discouragement
·
Discriminatory effects
ECOA encourages
creditors to self-test their lending programs to determine if
any of their employees are using discriminatory lending practices.
disparate treatment, using different
standards for determining whether to offer a loan to a member of a protected
class is the most obvious form of discrimination. The official commentary
to Regulation B offers several examples of disparate treatment.
Regulation B clarifies that prohibited
practices under ECOA are not limited to blatant acts of discrimination.
Creditors are also prohibited from making “any
oral or written statement, in advertising or otherwise, to applicants or
prospective applicants that would discourage on a prohibited basis a reasonable
person from making or pursuing an application” (12 C.F.R. §1002.4(b)).
policy or practice has a discriminatory
effect if it has a disproportionately negative impact on
members of a protected class (Official Interpretations, 12 C.F.R.
§1002.6(a)(2.)). An example of a policy with a discriminatory effect is
offering home loans only to consumers with credit scores of 740 and above.
Limiting mortgages to consumers with higher credit scores may have the
effect of preventing members of a protected class from having access to
mortgage credit. Regulation B implements ECOA’s general
prohibitions by prohibiting certain inquiries during the loan application
process and restricting the factors that lenders may consider when deciding
whether to extend credit to a loan applicant. egulation
B lists many factors that creditors are prohibited from considering when
evaluating the creditworthiness of a loan applicant. These prohibited
considerations include:
·
Age:despite the prohibition on inquiries about
age, inquiries are permitted when a creditor needs to determine whether a loan
applicant is old enough to enter a binding contract. Asking older loan
applicants for their age is permitted when age is:
o A variable that is used in a credit scoring
system, such as the system developed by FICO, to evaluate creditworthiness
o Used in a non-scoring system in which prior
experience with applicants of a similar age is used to evaluate
creditworthiness
o A favorable consideration
·
Potential
to have children: creditors are
prohibited from making assumptions and from using aggregated statistics to
determine the likelihood that a person will have children, or will receive less
or “interrupted” income as a result of having or raising children.
·
Income
sources: ECOA prohibits
income discounting based on the sex of the loan applicant. It also prohibits
income discounting because the income is from part-time employment, retirement
benefits, an annuity, or pension. However, creditors may consider the “probable
continuance” of income (as long as childbearing is not a consideration), and if
an applicant is relying on alimony and/or child support to establish loan
eligibility, creditors may consider the likelihood that these payments will be
consistent.
·
Race,
color, religion, national origin, and sex: creditors are absolutely prohibited from considering these
personal characteristics as a basis for determining an applicant’s eligibility
for a loan.
·
Marital
status: marital status
cannot be considered in determining the creditworthiness of an applicant.
(12 C.F.R. §1002.6)
Any mortgage lender or
broker that collects and intends to disclose nonpublic personal information to
nonaffiliated third parties must offer a(n) _______ notice with the initial
privacy notice.
A.
Arbitration
B.
Opt-out
C.
Exemption
D.
Release
Correct. Any mortgage lender or broker
that collects and intends to disclose nonpublic personal information
to nonaffiliated third parties must offer an opt-out notice with the initial
privacy notice.
Creditors send
_________ into lending institutions to apply for mortgage credit in order to
determine whether similarly situated applicants are being treated fairly.
A.
Players
B.
Testers
C.
Samplers
D.
Straw
applicants
Correct. Creditors send testers into lending
institutions to apply for mortgage credit in order to determine whether
similarly situated applicants are being treated fairly.
Which federal law
requires the collection of demographic data from consumers so that regulators
can monitor lenders’ compliance with fair lending laws?
A.
Homeowners
Protection Act
B.
Gramm-Leach-Bliley
Act
C.
Truth-in-Lending
Act
D.
Home
Mortgage Disclosure Act The Home Mortgage Disclosure Act requires the collection of demographic
data from consumers so that regulators can monitor lenders’ compliance with
fair lending laws.
Which of the following
is not one of the five elements that a security program must include in order
to comply with the Safeguards Rule?
A.
Designation
of an employee to coordinate the program
B.
Completion
of bi-annual training for all employees
C.
Overseeing
of third party service providers
D.
Identification
of reasonably foreseeable risks to security
Correct. There are five elements that a security
program must include in order to comply with the Safeguards Rule; the
completion of bi-annual training for all employees is not required.
In order to prevent
and mitigate identity theft, the Red Flags Rule requires mortgage professionals
to establish a(n):
A.
Risk
Recognition Program
B.
Identity
Theft Prevention Program
C.
Red
Flags Detection Program
D.
Consumer
Fraud Protection Program
Correct. In order to prevent and mitigate identity
theft, the Red Flags Rule requires mortgage professionals to establish an
Identity Theft Prevention Program
he specific
requirements for meeting the ability-to-repay standards are outlined in the
CFPB’s Ability to Repay Rule, which applies to all transactions for
home loans except those for open-end home equity lines of credit and timeshare
plans (12 C.F.R. §1026.43(a)). The ATR Rule requires creditors to base a
determination of repayment ability on a consumer’s:
·
Current or reasonably
expected income or assets
·
Employment, if the
consumer is relying on income from employment to qualify for a loan
·
Monthly principal and
interest payments
·
Payments on
simultaneous loans
·
Monthly payments for
mortgage-related obligations, such as taxes and insurance
·
Current financial
obligations, including alimony and child support
·
Debt-to-income ratio
·
Credit history
What is the name of
a simultaneous second mortgage that provides the borrower with funds to
make a down payment?
A.
Binary
loan
B.
Piggyback
loan
C.
Extra
loan
D.
Successive
loan
he use of false
information to enhance an application for a home purchase loan is known as fraud for housing.
When a consumer
is financing the purchase of a home and provides false information about its
intended use, he/she is committing occupancy
fraud. Falsely representing that a house will serve as a primary
residence is in violation of the Federal False Statements Act and other federal
laws
occupancy fraud
known as reverse
occupancy fraud. This type of fraud is used by borrowers who are not
likely to secure approval for a home loan due to lower incomes and
unestablished credit. By falsely stating that they are purchasing a home
as an investment property, these borrowers use the false promise of rental income
as an asset that will help them qualify for a mortgage. After securing a
loan to finance the purchase of a dwelling, participants in schemes for reverse
occupancy move into the home and never have tenants.
A gift letter should
include a:
A.
Statement
that the applicant may use the gift money for any purpose
B.
Description
of the donor’s occupation and length of employment
C.
Description
of the relationship between the applicant and donor
D.
Statement
that the donor expects repayment of the gift money
Regulation C are
extensive, and with the elimination of asset-size thresholds for nonbank
lenders, the rules apply to many lenders that have not had to comply with HMDA
in the past.
Section 8 of the URLA
includes information about the loan originator, including the loan
originator’s:
A.
Surety
bond claim number
B.
Number
of years with the company
C.
Residential
address
D.
NMLS
unique identifier
There are three basic steps in the money laundering process, and
they are:
·
Placement deposit illegally-earned funds in a financial institution
·
Layering deposit illegally-earned funds in a financial institution
·
Integration converting illegal funds into seemingly legitimate business
earnings.
What is the term used
in the BSA regulations to identify nonbank lenders and mortgage brokers?
A.
Non-depository
mortgage companies
B.
Residential
mortgage loan originators
C.
Mortgage
loan entities
D.
Regulated
lenders and brokers
Correct.
·
Mandatory
reporting: the objective
factor that necessitates the filing of a SAR is the occurrence of a transaction
of at least $5,000in circumstances in which an RMLO knows,
suspects, or has reason to suspect that the transaction:
o Involves funds obtained through illegal
activity
o Is intended to hide or disguise money or
assets derived from an illegal activity
o Is designed, through structuring or other
methods, to evade the reporting requirements of the BSA, or
o Lacks a lawful purpose or is not the type of
transaction in which the customer normally engages, and is one that has no
reasonable explanation
The $5,000 trigger for filing a SAR may be based on a single
$5,000 transaction or on an aggregated amount of $5,000 (31 C.F.R.
§1029.320(a)(2)).
·
Voluntary
reporting: BSA regulations
state that RMLOs may also file reports of suspicious activities in the absence
of the $5,000 trigger if they believe that suspicious transactions may be
related to potential violations of the law (31 C.F.R. §1029.320(a)(1)).
The $5,000 trigger for filing SARs is almost identical to the
requirement with which banks must comply. In fact, it is the requirement for
banks to report suspicious transactions of $5,000 or more that led Buddy to make
deposits of less than $5,000 in multiple banking institutions instead of making
single deposits of $5,000 or more into one account.
SARs are due no
later than 30 calendar days after a
suspicious event is detected. If the financing of terrorist activities or
ongoing money laundering schemes are suspected, immediate notification to an
appropriate law enforcement authority is required and should be followed by the
timely filing of a SAR RMLOs that fail to establish an AML program
and to report suspicious activities may be held liable for willfully violating
BSA requirements. Willful violations of the law are subject to civil
penalties, which are adjusted annually for inflation and typically range from
$50,000 to $225,000 per violation (31 C.F.R. §1010.821(b)). FinCEN has
imposed penalties of several million dollars on banks that have failed to
establish and follow effective AML programs or to file SARs. These amounts do
not create a cap for the penalties, and ongoing violations can result in additional
penalties for each day that a violation continues.
RMLOs may be held
liable for willfully violating BSA requirements if they fail to:
A.
Establish
an AML program or report suspicious activities
B.
Correctly
detect a money laundering scheme
C.
Register
with the AML Detection Network
D.
Pay
into the AML Recovery Fund
The ATR Rule defines
_________ as the sum of periodic payments of principal and interest, any
simultaneous loans, mortgage-related obligations, and current debt obligations,
including alimony and child support.
A.
Back-end
ratio
B.
Total
monthly debt obligations
C.
Aggregate
debt
D.
Front-end
ratio
