Mortgage Loans

The TILA-RESPA Integrated Disclosure Rule became effective on October 3, 2015, and has determined how estimated and actual loan costs are disclosed in transactions for closed-end mortgages that are secured by real property (12 C.F.R. §1026.19(e)(1)(i)).

The types of transactions that are subject to the rule include:

· Conventional closed-end home purchase loans

· Conventional closed-end refinances

· Non-conventional closed-end home purchase loans, including FHA loans and VA loans

· Non-conventional closed-end refinances

· Closed-end home equity loans

The TRID Rule does not apply to:

· Open-end mortgages, such as open-end home equity lines of credit

· Reverse mortgages

The goals of the TRID Rule are to:

· Provide consumers with more reliable estimates of loan and closing costs

· Offer estimates within a timeframe that allows borrowers to make informed decisions regarding mortgage debt

· Encourage borrowers to shop for settlement services

· Eliminate the surprise of unanticipated cost increases at the closing table

The first step towards TRID Rule compliance is to understand the definitions that the rule provides for the following terms:

· Application

· Business day

· Consummation

Understanding these terms is important because they determine when disclosure deadlines begin to run and how they are calculated.

Application: the three-business-day deadline for providing a Loan Estimate begins to run after a creditor receives an “application” for a mortgage. By definition, a complete application consists of the submission of the following six pieces of information:

· Loan applicant’s name

· Loan applicant’s Social Security number

· Loan applicant’s income

· Address of the property that will secure the mortgage

· Estimated value of the property

· Loan amount sought

(12 C.F.R. §1026.2(a)(3)(ii))

Even if a loan applicant fails to complete a Uniform Residential Loan Application (URLA) by providing information on his/her employment, assets, and liabilities, a creditor is deemed to have received an application when it has the six pieces of information listed above (12 C.F.R. §1026.19(e)(1)(iii)).

Business day: Regulation Z provides two definitions for “business day.”

Under the first definition, “business day” means any day on which the creditor’s offices are open to the public for carrying out substantially all business functions. This definition is used for purposes of determining:

· The three-business-day deadline for providing a Loan Estimate after receiving a consumer’s application for a mortgage

· The three-business-day deadline for providing a revised Loan Estimate after receiving information that requires or permits a revised estimate

· The ten-business-day expiration period for a Loan Estimate

Under the second definition, “business day” means all calendar days except Sundays and legal public holidays, which include New Year’s Day, Martin Luther King’s birthday, George Washington’s birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran’s Day, Thanksgiving, and Christmas (12 C.F.R. §1026.2(a)(6)). This definition is used for purposes of calculating:

· The seven-business-day waiting period that must elapse between the date that a creditor mails or otherwise delivers a Loan Estimate and the date of consummation

· The three business days that are assumed to elapse between the mailing of a disclosure and a loan applicant’s receipt of it

· The four-business-day waiting period between a consumer’s receipt of a revised Loan Estimate and consummation

· The three-business-day waiting period that must elapse between a consumer’s receipt of a Closing Disclosure and consummation

There is an easy way to remember the distinction between these two definitions. When counting the number of days that a creditor has to prepare a Loan Estimate or a revised Loan Estimate, it is logical to count only those days when an originator is in the office to perform the work required to complete the disclosure of estimated costs. For example, creditors are required to provide a Loan Estimate within three business days of receipt of a loan application, and Saturdays are not counted if an originator’s office is not open on that day. The second definition of “business day” is related to the delivery of a disclosure and corresponds with the days that the U.S. Postal Service is open for normal mail processing and delivery.

Consummation: the time that a consumer becomes contractually obligated on a credit transaction (12 C.F.R. §1026.2(a)(13)). State law determines when a consumer is subject to the contractual obligations under a lending agreement. Often, the closing date and the date of consummation are the same. Identifying the consummation date is of critical importance when determining:

· Whether the three- or four-business-day waiting periods prior to consummation have elapsed, and

· When the 30- or 60-day deadlines begin to run for post-consummation disclosures

· Throughout the course, the terms “loan applicant” and “consumer” are used synonymously. “Consumer” is the term that the TRID Rule uses to refer to individuals who are applying for mortgage credit. Despite the use of this term in the regulations, the model forms make use of the term “borrower” to refer to loan applicants.

· The ultimate goal of the TRID Rule is to ensure that creditors provide loan applicants with reliable or “good faith” estimates of the costs associated with a mortgage. Estimated costs are made in good faith when charges paid by or imposed on a consumer do not exceed the amounts disclosed on the Loan Estimate (12 C.F.R. §1026.19(e)(3)(i)). Although this regulation seems to prohibit an increase in estimated costs, variances between some estimated and actual costs are permitted.

· The TRID Rule establishes three tolerance levels for variances between estimated and actual charges.

Generally, no variances are permitted for fees controlled by or known to the creditor. For example, no variance is permitted for fees charged by a creditor or one of its affiliates. Other fees that are subject to a zero tolerance include, but are not limited to:

· Fees paid to a provider of settlement services if the loan applicant is not allowed to shop for settlement services

· Fees paid to a mortgage broker

· Fees paid for transfer taxes

(Official Interpretations, 1026.19(e)(3)(i)(1.))

Increases in estimated charges for third-party settlement services are permitted when:

· The aggregate amount for third-party services does not exceed estimated aggregate charges by more than 10%

· The charges for third-party services are not paid to a creditor or to one of its affiliates, and

· The creditor allows the consumer to shop for third-party settlement services

(12 C.F.R. §1026.19(e)(3)(ii))

Variances between the estimated and actual cost of certain charges are permitted if the estimated charge was based on “the best information reasonably available” to the creditor at the time the estimate was made (12 C.F.R. §1026.19(e)(3)(iii)). The exercise of due diligence is required in order for a creditor to demonstrate that an estimate was based on the best information reasonably available. The particular charges that are not subject to a tolerance limit include the following.

Prepaid interest: these are charges that borrowers pay at closing for interest that accrues between the closing date and the end of the month when the closing takes place. In order for this charge to fall within the category of fees that is subject to an unlimited tolerance, the creditor must base the calculation for prepaid interest on the scheduled closing date. For example, if a closing is scheduled for October 15, the prepaid interest must be calculated from that day and not from a later date, such as October 20.

Premiums for property insurance: this cost falls within the unlimited tolerance category when the need for insurance is not certain. For example, if a home is located in an area where floods occur but is not located in a flood zone where flood insurance is required, the omission of an estimate for flood insurance premiums is not a violation of the requirement to offer a good faith estimate of closing costs.

Amounts paid into an escrow account: although escrow amounts are listed as costs subject to unlimited tolerance, creditors must complete due diligence before estimating the cost of escrowed items, such as premiums for homeowner’s insurance and property taxes. Appropriate due diligence would include contacting insurance providers for estimates for the cost of a policy and contacting the local tax office to determine current property taxes.

Charges for consumer-selected third-party providers: if a consumer chooses a third-party settlement service provider that is not on the creditor’s list of recommended providers, the fees for that provider are not subject to tolerance limits.

Charges for optional products and services: fees paid to third-party providers for services and products not required by the creditor are not subject to tolerance limits. For example, consumers are not required to purchase title insurance for their own protection, but when choosing to do so, the estimated and actual costs of this insurance may differ.

The remainder of the course sections pertaining to TRID will review provisions of the TRID Rule that are relevant to closed-end transactions for fixed-rate mortgages, and will do so within the context of a scenario that describes a fictitious transaction between client and Mortgage Company. When reviewing the scenario, assume that:

· Mortgage Company is not open for business on Saturday, therefore, Saturdays are not “business days” and are not counted when calculating deadlines for providing Loan Estimates and revised Loan Estimates

· The transaction is taking place in a state where the closing date and consummation of the loan occur on the same day

· The four-business-day waiting period may turn into a wait of seven business days when a revised disclosure is mailed, and this is because a consumer is deemed to receive a revised Loan Estimate three business days (including Saturdays) after a creditor mails the revised estimate.Content

· When creditors deliver initial or revised Loan Estimates by other means, such as direct delivery or email, they may begin calculating the four-business-day waiting period on the day that direct delivery is made or on the day they receive an email confirming receipt of an electronically-transmitted disclosure. For example, the CFPB states in its official commentary that if a creditor emails a Loan Estimate on a Tuesday at 1:00 p.m. and the consumer acknowledges receipt of it at 5:00 p.m., the creditor can demonstrate that the consumer received the disclosure on the date of the same day that it was transmitted (Official Interpretations, 1026.19(e)(1)(iv)(2.)).

As a good faith estimate of closing costs, an official Loan Estimate must meet accuracy tolerances that limit variances between estimated and actual costs. However, loan originators may face circumstances, such as those described in the scenario, in which too little information is available to offer an estimate that can meet these standards for accuracy. The regulations do not prohibit the use of an unofficial estimate if the originator makes it clear that a potential loan applicant should not rely on it as an accurate reflection of available loan terms and settlement costs.

The TRID Rule establishes the following specific requirements for an unofficial estimate:

· It must include a clear and conspicuous written statement on the first page in at least 12-point font that states, “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”

· The headings, format, and content of an unofficial disclosure cannot resemble those found on an official Loan Estimate

(12 C.F.R. §1026.19(e)(2)(ii))

The facts in the scenario do not indicate whether the unofficial estimate that I provided satisfied each of these requirements. She cautioned client that the disclosure was an unofficial one, but simply telling a consumer that an estimate is unofficial is not sufficient to show compliance with the TRID Rule. The regulations clearly establish that warnings related to the limitations of an unofficial estimate must be in writing.

The circumstances described illustrate how a creditor’s obligation to provide a Loan Estimate is triggered. I complied with the TRID Rule by sending client an official Loan Estimate within three business days of her receipt of the six pieces of information that constitute an “application,” as that term is defined in Regulation Z. Despite the fact that client’s URLA was incomplete, I received an “application” from him when he indicated the amount that he needed to borrow and submitted his name, income, Social Security number, the address of the property he wanted to purchase, and its estimated value (12 C.F.R. §1026.19(e)(1)(iii)).

Today, it is common to offer disclosures via email, and this practice is legal as long as a consumer provides prior consent electronically. However, in order to demonstrate the additional timing considerations that come with placing disclosures in the mail, the scenario describes use of the USPS in the early stages of client’s transaction. As the scenario unfolds, “facts” related to the close timing for client’s closing date will show the requirements related to the electronic delivery of disclosures.

Determining whether a Loan Estimate is made in good faith involves comparing the costs disclosed on the Loan Estimate and on the Closing Disclosure and calculating differences between the estimated and actual charges (Official Interpretations, 1026.19(e)(3)(iv)(1.)). Loan costs can vary with market changes, and the regulations protect creditors from hesitation and delay on the part of consumers by creating a ten-business-day expiration for Loan Estimates (12 C.F.R. §1026.19(e)(3)(iv)(E)). A creditor may offer to extend the expiration date since there are no regulations that preclude the negotiation of this point between loan applicants and creditors.

If a creditor and a consumer do not agree on a longer expiration period and a consumer indicates an intent to proceed with a transaction more than ten business days after a creditor provides an official Loan Estimate, the creditor:

· May issue a revised disclosure

· Is not required to document reasons for higher costs than those listed on the original Loan Estimate, and

· Should include a document in the loan file stating that it issued a revised disclosure at the end of the ten-business-day expiration period

· When providing a revised disclosure in response to a consumer’s delayed notice of his/her intent to proceed, the original Loan Estimate is not relevant when determining whether the creditor offered a good faith estimate of closing costs. Instead, the revised estimate and the Closing Disclosure are compared.

· When calculating the ten-business-day expiration period, business days include those days that a creditor’s offices are open to the public to perform substantially all business functions (12 C.F.R. §1026.2(a)(6)).

· On the afternoon of Thursday, August 10, I had legitimate reasons for putting aside her other responsibilities to prepare an SSP list for client. The requirement to provide a written list of service providers is subject to the same three-business-day deadline that applies to the Loan Estimate, meaning I needed to send out the list on August 10 in order to remain in compliance.

When a consumer is allowed to shop for settlement services, the following tolerances apply:

· 10% tolerance: the permissible variance between estimated and actual charges is 10% when a creditor allows a consumer to shop for settlement services and the consumer selects a settlement service provider from the SSP list

· Unlimited tolerance: if a creditor allows a consumer to shop for settlement services and the consumer chooses a provider that is not on the SSP list, no limits apply to the variance between estimated and actual charges

When a creditor does not allow a consumer to shop for settlement services, the tolerance for variances between estimated and actual costs is zero. Therefore, if I failed to provide the SSP list in a timely manner, no variances would be allowed between the estimated and actual costs for settlement services (Official Interpretations, 1026.19(e)(3)(iii)(3.)).

I’s separate delivery of the Loan Estimate and SSP list was not a violation of the TRID Rule. In fact, the rule actually requires creditors to provide the SSP list separately from the Loan Estimate, and prohibits creditors from including information about service providers on the Loan Estimate (12 C.F.R. §1026.19(e)(1)(vi)(C)).

I satisfied another regulatory requirement when she mailed an Affiliated Business Arrangement Disclosure with the SSP list. Creditors are allowed to include affiliates on the list of recommended service providers, but including an affiliated provider’s name on the list constitutes a referral that is subject to the disclosure requirements of RESPA (Official Interpretations, 1026.19(e)(1)(vi)(7.)).

The Appendix to Regulation Z includes a number of model forms that are intended to facilitate compliance with the TRID Rule, and these include form H-27 for the SSP list. Although use of most model disclosure forms is required, use of form H-27 is optional. Creditors, such as the fictitious LL Mortgage Company, may create their own form as long as the substance and clarity of the disclosure is not affected.

Additional requirements related to the SSP list include:

· Providing recommendations for providers who are actually in business and able to provide services in the area where the consumer or his/her property is located

· Disclosing sufficient contact information to allow the consumer to reach recommended service providers

· Limiting qualification requirements for service providers that consumers find on their own to those that are “reasonable,” such as requirements for licensing in the jurisdiction where the services will be performed

(12 C.F.R. §1026.19(e)(1)(vi)(C); Official Interpretations, 1026.19(e

Until a consumer confirms that he/she wishes to proceed with a transaction, the TRID Rule prohibits the collection of any fee other than a fee for obtaining a credit report (12 C.F.R. §1026.19(e)(2)(i)(A)). I complied with the TRID Rule by waiting to ask for an application fee until Client stated his intent to move forward. Collecting a $35 fee to run a credit check during her second meeting with Client was not in violation of the law since the fee was bona fide and reasonable. The regulations do not include particular requirements for establishing a consumer’s intent to proceed with a transaction. In fact, this confirmation may be oral as long as the creditor documents it. I acted in compliance with the TRID Rule by confirming Client’s intent and documenting it with the placement of a note in his loan file.

The TRID Rule encourages creditors to provide reliable Loan Estimates by limiting the circumstances in which they can revise an initial estimate and offer a revised Loan Estimate. There is only one circumstance in which a revised estimate is required, and that is when a rate-lock occurs after an initial Loan Estimate is delivered to a consumer. For example, if a loan applicant pays for a rate-lock after receiving an initial Loan Estimate, the creditor must provide a revised disclosure that lists the new interest rate and any other rate-dependent charges and terms. The revised Loan Estimate is due within three business days of the date that the interest rate is locked (12 C.F.R. §1026.19(e)(3)(iv)(D)).

In the following circumstances, revised Loan Estimates are permitted, but not required:

· Changed circumstances that affect settlement charges:if changed circumstances cause the amounts stated on the Loan Estimate to increase, or cause the aggregate amount of estimated charges and recording fees that are subject to the 10% tolerance to increase by more than 10%, the creditor may issue a revised Loan Estimate. This may include:

o Extraordinary or unexpected events: these may include war or a natural disaster. They may also include other unexpected events that are less catastrophic. In its official commentary, the CFPB gives the example of a creditor that prepared a Loan Estimate using costs for title services from a title company that goes out of business during the underwriting stage of a transaction. In this circumstance, a revised Loan Estimate is permitted.

o Inaccurate information: a changed circumstance may include a determination that information relied on by the creditor is inaccurate. The CFPB cites the example of a consumer who states earnings of $90,000 on a loan application when his salary is actually $80,000. When underwriting discovers this inaccuracy in information that the creditor relied on when providing the Loan Estimate, a changed circumstance has occurred and a revised Loan Estimate is permitted.

o New information: even if not relied on by the creditor, new information may justify a revised Loan Estimate. The rules do not define the meaning of “new information,” but in its official commentary, the CFPB uses the example of a boundary dispute with a neighbor that arises when a home seller puts his/her house on the market.

· Changed circumstance affecting eligibility: changed circumstances affecting eligibility may include events that impact a consumer’s eligibility for a mortgage, such as loss of employment. They may also include circumstances related to the suitability of a home as security for a loan. For example, if damage to a home occurs during the underwriting process, a changed circumstance has occurred.

· Revisions requested by the consumer: a changed circumstance occurs if a loan applicant asks for changes to the loan terms or settlement, and these requested changes result in an increase in an estimated charge.

· Expiration of offer: as noted earlier, a Loan Estimate expires if a consumer waits more than ten business days to state an intent to proceed, and a revised disclosure may be provided.

· Delays related to construction loans: if the creditor reasonably expects settlement to occur more than 60 days after providing the applicant with a Loan Estimate, a revised disclosure can be provided, so long as the original Loan Estimate clearly and conspicuously states that the creditor may issue revised disclosures at any time prior to 60 days before consummation.

(12 C.F.R. §1026.19(e)(3)(iv))

If a creditor has the option of revising a Loan Estimate, it must provide the revised disclosure within three business days of obtaining information that will permit the use of a revised disclosure (12 C.F.R. §1026.19(e)(4)(i)). In addition, the revised disclosure must be received by the consumer no later than four business days prior to consummation (12 C.F.R. §1026.19(e)(4)(ii)). If the revised Loan Estimate is mailed, the consumer is considered to have received it three business days after the disclosure is placed in the mail (12 C.F.R. §1026.19(e)(1)(iv)).

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The TRID Rule permits no variances between the estimated and actual costs for transfer taxes (Official Interpretations, 1026.19(e)(3)(i)(1.)). Fees for transfer taxes are calculated as a percentage of the sales price of a home, and the percentage that is charged varies greatly in different states and counties. The original Loan Estimate that I provided showed that Client did not have to contribute to the cost of transfer taxes. Assume that the cost of transfer taxes in Client’s transaction is 1.25% of $200,000, or $2,500. Client’s agreement to pay 60% of this amount ($1,500) is a significant increase in the cost of the transaction.

If LL Mortgage Company failed to revise the Loan Estimate to reflect Client’s contribution of $1,500 in transfer taxes, the zero tolerance for variances between estimated and actual costs for this fee would mean that the lender would have to pay Client a refund of the difference between the actual cost of $1,500 and the estimated cost of $0 (12 C.F.R. §1026.19(f)(2)(v)). If LL Mortgage Company failed to pay this refund, it would be liable for violating its obligation to provide Client with a good faith estimate of his loan costs.

The revised Loan Estimate is due three business days after I learns, on Friday, that Client must pay a portion of the transfer taxes. Since Saturday, Sunday, and Labor Day are not business days, I satisfied the requirements of the TRID Rule when she mailed the revised Loan Estimate on Thursday, September 7.

The TRID Rule permits revisions to a Loan Estimate when a change in circumstances impacts a loan applicant’s eligibility for mortgage credit. If Client is not eligible for a loan without PMI and his appraisal shows that a prior calculation for the cost of it was based on an inaccurate LTV ratio, then the rules permit I to prepare a revised Loan Estimate. Since LL Mortgage Company is not permitting Client to shop for a provider of PMI and will require him to purchase it from an affiliate, the tolerance for variances between estimated and accurate costs is zero, and the need to disclose the new cost is necessary for purposes of offering a good faith estimate.

When I sent Client an initial Loan Estimate on August 10 and mailed revised estimates to him on September 7 and 12, the fees that she included for property taxes were based on the best information that was reasonably available to her at the time. Property taxes are one of the fees for which variances between estimated and actual costs are allowed as long as the estimated taxes are based on the best information reasonably available. Therefore, I does not have to send Client a revised Loan Estimate in order to ensure that the fees listed for property taxes were provided in good faith.

While reviewing these rules, recall that Client’s transaction is taking place in a state where a loan’s closing and consummation are deemed to occur at the same time:

· With a rate change, a revised Loan Estimate is mandatory: the single circumstance in which a revised Loan Estimate is required is when a consumer and creditor enter a rate-lock agreement after delivery of the initial Loan Estimate (12 C.F.R. §1026.19(e)(3)(iv)(D)).

· The revised Loan Estimate is due within three business days after the rate is locked: since Client locked his interest rate on Tuesday, October 3, I must mail or otherwise deliver a revised Loan Estimate no later than Friday, October 6 (12 C.F.R. §1026.19(e)(3)(iv)(D)).

· Receipt of a revised Loan Estimate must occur four business days prior to closing: Client must receive his Loan Estimate four business days prior to closing. If I mails the revised estimate on Tuesday, it is assumed that Client will receive it three business days later, on Friday October 6, leaving insufficient time for the mandatory four-business-day waiting period that must elapse prior to a closing on Tuesday, October 10. In fact, if the revised estimate is mailed, the closing could not occur until Thursday, October 12 (recall that the applicable definition of “business day” used in calculating the four-business-day period would count Saturday, but not Sunday or Monday which is Columbus Day, a legal public holiday). Hand-delivering or emailing the disclosure and obtaining a confirmation of receipt is an option that will enable the requisite waiting period to occur (12 C.F.R. §1026.19(e)(4)(ii)).

· Same-day delivery of a revised Loan Estimate and Closing Disclosure is prohibited: the TRID Rule prohibits delivery of a revised Loan Estimate “on or after the date” that a creditor delivers a Closing Disclosure (12 C.F.R. §1026.19(e)(4)(ii); Official Interpretations, 1026.19(e)(4)(ii)(1.)).

· Receipt of the Closing Disclosure must occur three business days prior to closing: if the closing is to take place on Tuesday, October 10, LL Mortgage Company faces timing constraints for the mandatory three-business-day waiting period that must elapse between Client’s receipt of the Closing Disclosure and the closing. If I mails the revised Loan Estimate on Wednesday, October 4, the soonest that she can send the Closing Disclosure is Thursday, October 5, and Client would be deemed to receive it on Tuesday, October 10. In these circumstances, the mandatory three-business-day waiting period would mean that the closing could not occur until Friday, October 13. As with delivery of the revised Loan Estimate, direct delivery or email delivery and Client’s same-day acknowledgment of receipt are options that I may pursue if she wants the closing to occur on October 10 (12 C.F.R. §1026.19(f)(1)(ii)(A)).

· Using a Closing Disclosure in lieu of a revised Loan Estimate is sometimes permitted: recognizing that some circumstances may require a creditor to provide a revised Loan Estimate when there are fewer than four business days between the date that a creditor must provide a revised estimate and consummation, the CFPB has stated that in these circumstances, the creditor may use a Closing Disclosure to provide information that it would otherwise include in a revised Loan Estimate (Official Interpretations, 1026.19(e)(4)(ii)).

· Waiting periods may be counted from the date of in-person delivery: multiple provisions of the TRID Rule and numerous Official Interpretations state that the calculation of a waiting period may begin on the date that a creditor delivers a disclosure to a loan applicant “in person” (12 C.F.R. §§1026.19(e)(1)(iv); (e)(4)(ii); (f)(1)(iii)).

· Waiting periods begin to run when a consumer sends an email confirmation of receipt of a disclosure: use of electronic transmittals can expedite disclosure delivery and receipt and the start date for waiting periods (Official Interpretations, 1026.19(f)(1)(iii)(2.)).

The TRID Rule allows consumers to waive the three- and four-business-day waiting periods for bona fide personal financial emergencies. The requirement for obtaining a waiver involves a consumer’s written description of the emergency that includes an express waiver of the waiting periods. The signatures of all individuals who will be liable for the debt are also required (12 C.F.R. §§1026.19(e)(1)(v); (f)(1)(iv)). The use of a printed form to obtain a waiver is prohibited. The example of a bona fide financial emergency that the CFPB cites in its official commentary is the need for loan funds to prevent a foreclosure.

I’s question about placing the final round of estimates on a Closing Disclosure instead of offering Client a revised Loan Estimate is one that many mortgage professionals have asked. The CFPB’s commentary on the topic states that if there are less than four business days between the date that a revised Loan Estimate is required to be provided and the consummation of a loan, creditors may comply with the requirement to provide a revised estimate by including the new information in the Closing Disclosure (Official Interpretations, 1026.19(e)(4)(ii)).

A close reading of the CFPB’s official commentary shows that the attorney at LL Mortgage Company may have interpreted the comment too strictly. Client’s rate-lock on Tuesday triggered the need to offer him a revised Loan Estimate, which was not “required to be provided” until Friday. Clearly, there are less than four business days between Friday and Tuesday. Therefore, the facts described in the scenario illustrate circumstances in which use of a Closing Disclosure in lieu of a revised estimate may be acceptable.

Of course, another point of concern is the TRID Rule’s mandate for creditors to offer a revised Loan Estimate after a consumer locks the interest rate. The rule states that the creditor must provide a revised Loan Estimate, which is due no later than three business days after the date the interest rate is locked (12 C.F.R. §1026.19(e)(3)(iv)(D)). If the changes related to Client’s transaction did not involve a rate-lock, LL Mortgage Company’s attorney and lending manager would probably have been more willing to give I approval to provide the updated information in a Closing Disclosure instead of offering it through a revised Loan Estimate.

Regardless of how the official commentary is interpreted, it is safe to say that the CFPB will not condone a creditor’s unmerited reliance on it to avoid issuing revised Loan Estimates. During a review of loan files, CFPB examiners will be able to identify transactions in which the absence of a revised Loan Estimate appears to be a compliance failure. With the aid of an attorney skilled in TRID Rule compliance, mortgage lenders should develop policies that identify circumstances in which their loan originators may bypass the preparation of a revised Loan Estimate to offer final estimates on a Closing Disclosure.

The Loan Estimate is meant to provide loan applicants with a manageable amount of comprehensible information in a well-organized format. Although simplicity is one of the primary goals of this disclosure, the TRID Rule includes complex rules for completing the Loan Estimate.

In addition to the specific rules on completion of the Loan Estimate, there are general rules that include requirements to:

· Use model form H-24, without making any deletions or other alterations, even for disclosures that are inapplicable to a particular transaction

· Leave blank spaces next to inapplicable disclosures on the model form, rather than using the phrase “not applicable” or the designation “N/A,” which are prohibited (Supplement I to 1026.37(1.))

· Use estimated costs that are rounded to the nearest whole dollar, with exceptions for:

o The amount of prepaid interest that is due at closing

o The monthly payments for homeowner’s insurance, mortgage insurance, and property taxes that are used to compute a rounded estimate for the initial escrow payment at closing

o The loan amount, although a loan amount that is a whole number must be “truncated at the decimal point” (Official Interpretations, 1026.37(o)(4)(i)(B))

o The estimated monthly principal and interest payment

· Disclose percentage amounts using up to three decimal places

· Ensure that any logo or administrative information added to the disclosure does not cover or alter the information shown on the model form

(12 C.F.R. §1026.37(o))

Loan applicants can look at page 1 of the Loan Estimate for an overview of the immediate costs of securing a loan and to see the future costs of repaying the debt and meeting other mortgage-related expenses, such as those for property taxes and insurance. This information is organized in three subparts:

· Loan Terms

· Projected Payments

· Costs at Closing

General information on the Loan Estimate includes descriptions of the loan term, its purpose (purchase, refinance, construction, or closed-end home equity), the product type, and a loan identification number. Loan identification numbers are determined by creditors and may contain any alpha-numeric characters (Official Interpretations, 1026.37(a)(12)). The Loan Estimate must include a heading that advises consumers to “Save this Loan Estimate to compare with your Closing Disclosure” (12 C.F.R. §1026.37(a)(2)). The general information also includes a warning to loan applicants that the interest rate, points, and lender credits may change when the interest rate is not locked.

If a transaction involves a rate-lock, creditors are required to indicate the time of day that the rate-lock expires. They must also indicate the time zone that is used to determine when the rate-lock period expires (12 C.F.R. §1026.37(a)(13)).

The August 24, 2017 date that Sofia added for the expiration of “all other closing costs” is related to the ten-business-day expiration period that began to run when Sofia sent Allen his original Loan Estimate on August 10. The August 24 expiration date was calculated by counting those days that LL Mortgage Company was open for business. Allen prevented the expiration of these estimated closing costs by indicating an intent to proceed with the transaction on August 14, which was well within the ten-business-day expiration period.

Loan terms include the loan amount, interest rate, and monthly principal and interest payments. When disclosing the interest rate and loan amounts, creditors must indicate, with a “Yes” or a “No,” whether future increases will occur. Increases in the loan amount will occur if a mortgage has a negative amortization feature, allowing unpaid interest to be added to the principal balance. Changes in interest rates will occur when a mortgage has an adjustable rate. Either of these changes will, of course, impact monthly principal and interest payments. In transactions for fixed-rate amortizing loans, such as Allen’s fictitious transaction with LL Mortgage Company, no increases are expected.

The loan amount is not written as $170,000.00 because the TRID Rule and the CFPB’s official commentary state that loan amounts must be disclosed as a whole number and truncated at the decimal point. However, the rules require the disclosure of estimated monthly principal and interest payments in dollars and cents.

Projected payments are likely to change over the course of a loan’s term and may do so for a number of reasons. For example, if a loan has an adjustable rate, payment amounts will increase when rate adjustments occur, and if a borrower is required to pay PMI, mortgage payments will decrease when PMI is cancelled or terminated, as required by the Homeowners Protection Act. Creditors must use the “Projected Payments” section of the Loan Estimate to disclose future changes in payment amounts.

While requiring creditors to show how projected payments may change over time, the Loan Estimate is intended to be a concise disclosure. Therefore, the table of projected payments may not disclose more than four separate periodic payments or ranges of payments (12 C.F.R. §1026.37(c)(1)(ii)). Since there are limits to the amount of information disclosed, the following rules help to determine which disclosures take priority over others:

· Payment changes due to a rate adjustment must be disclosed

· A balloon payment that is scheduled as the final payment must always be disclosed as a separate periodic payment and should be labeled as “Final Payment.” Disclosure of a balloon payment must include the maximum amount of the balloon payment and the date that it is due.

· The termination of PMI must be disclosed, but only if more critical disclosures, such as those related to rate adjustments and balloon payments leave room for the disclosure of lower payments following the termination of PMI

(12 C.F.R. §1026.37(c)(1))

This hierarchy for the disclosure of information is intended to prevent defaults by drawing loan applicants’ attention to the more expensive payments that will come with rate adjustments and balloon payments. Lower payments, such as those that result from the termination of PMI, do not create the potential for default and are, therefore, a less critical disclosure.

Because lenders have no control over the costs that borrowers will pay per month for property taxes and homeowner’s insurance, these estimated amounts are disclosed separately with a warning that they may increase over time.

There is a note at the bottom of the Loan Estimate directing consumers to the CFPB website for information and tools. This referral to the CFPB’s online resources is mandatory (12 C.F.R. §1026.37(e)). The “tools” provided on the website include the CFPB’s guide to shopping for a mortgage, which is entitled Your Home Loan Toolkit: A Step-by-Step Guide. This 25-page guide provides an overview of many of the costs associated with a transaction for a mortgage and an explanation of the information offered in Closing Disclosures. Loan originators should encourage all loan applicants, and especially first-time homebuyers, to review this information.

Page 2 of the Loan Estimate gives loan applicants a breakdown of the costs of a transaction for a mortgage and shows how the “Costs at Closing” disclosed on page 1 were calculated. The TRID Rule outlines the steps that creditors must follow when providing “Closing Cost Details” and provides the calculations that they must complete to determine specific costs. This page is divided into two sections.

“Loan Costs” are located on the left side of the page, and they include:

· Fees paid to the creditor, including origination charges

· Fees paid to third-party settlement service providers

The itemized amounts of these fees are disclosed in subsections A-C, and the total amount is shown in subsection D.

“Other Costs” are itemized on the right side of the page, and they include:

· Taxes

· Recording fees

· Prepaid amounts for insurance, interest, and taxes that are due at closing

· Initial escrow payments for property taxes, homeowner’s insurance, and PMI

The itemized amounts of these fees are disclosed in subsections E-I, and the total amount is shown in subsection J.

The first cost details provided on page 2 of the Loan Estimate are those related to origination charges, which are the amounts paid by a consumer to a creditor and loan originator for originating and extending credit (12 C.F.R. §1026.19(f)(1)). In its official commentary, the CFPB states that origination charges include amounts paid to creditors and originators regardless of how such fees are denominated (Official Interpretations, 1026.37(f)(1)(1.)).

Although the TRID Rule does not offer a checklist of origination charges, the official commentary cites application fees, origination fees, underwriting fees, processing fees, verification fees, and rate-lock fees as examples of origination charges (Official Interpretations, 1026.37(f)(1)(3.)).

Presentation of origination charges on the Loan Estimate is subject to the following requirements:

· List discount points first: if a consumer pays points to reduce the interest rate, this must be the first origination charge included on the disclosure. The language for disclosing this amount is printed on the model form: “ % of Loan Amount (Points).”

· Itemize charges alphabetically: charges other than points must be itemized and presented in alphabetical order

· Limit itemized charges: the Loan Estimate may include no more than 13 itemized charges, including the disclosure of points

· Use of addenda prohibited: if all the origination charges do not fit within the designated space, the remaining charges must be disclosed in an aggregated amount and labeled as “additional charges”

· Use rounded numbers: origination charges must be rounded to the nearest whole number

· Use of exact percentages: amounts expressed as a percentage, such as those for discount points, must be stated as an exact number using up to three decimal places

(12 C.F.R. §1026.37(f)(1), (6))

The additional information shown on the “Loan Costs” side of page 2 is the cost of third-party settlement services. The disclosure form divides the cost of settlement services into two sections: those for which the loan applicant cannot shop, and those for which the applicant can shop. As discussed earlier, allowing consumers to shop for settlement services is a factor that determines whether a variance is allowed between estimated and actual closing fees.

Like origination charges, the presentation of fees for settlement services must meet regulatory requirements. When loan originators put this information on a Loan Estimate, they must:

· Alphabetically itemize charges: fees for settlement services must be listed in alphabetical order

· Limit itemized charges: the number of services for which loan applicants cannot shop is limited to 13, and the number of services for which loan applicants can shop is limited to 14

· Restrict the use of addenda:

o Addenda prohibited: if the fees for settlement services that the loan applicant cannot shop for do not fit within the designated space, the remaining charges must be disclosed in an aggregated amount and labeled as “additional charges”

o Addenda permitted: if all the fees for settlement services that the loan applicant can shop for do not fit within the designated space, the last line may reference an addendum where the remaining charges may be listed

· Label title insurance: fees that are related to title insurance must be labeled as “Title,” followed by a more specific description, such as “Lender’s Title Policy”

(12 C.F.R. §1026.37(f)(2),(3), (6))

Consumers are not likely to be familiar with the fees typically charged in a transaction to finance a home purchase. A loan originator’s ability to provide straightforward explanations helps to dispel consumers’ concerns about potentially bogus charges. For example, fees on Allen’s Loan Estimate that would be unfamiliar to most consumers include the flood determination, tax monitoring, and verification services fees. Assume that Allen asks about these fees. Sofia should be prepared to provide a basic explanation of them.

Flood determination fee: flood hazard determination services enable creditors to decide whether a borrower needs to purchase flood insurance. Using Federal Emergency Management Agency (FEMA) data, providers of these services determine whether a property that will secure a mortgage is located in a flood zone.

Tax monitoring fee: liens for unpaid property taxes have priority over other liens on a home, including a lender’s first mortgage. If a homeowner fails to pay property taxes, or if a loan servicer makes a mistake and fails to pay property taxes from an escrow account, the government agency that imposed the tax may initiate an action known as a tax sale, which is similar to a foreclosure. Unpaid taxes that a borrower owes to a government entity are paid from the proceeds of a tax sale before other lienholders, such as mortgage lenders, are paid. Since unpaid property taxes can compromise the ability of lenders to recover the full amount that they have invested in a mortgage, some choose to pay for a service that monitors the payment of property taxes.

Verification services fee: lenders may rely on providers of verification services to confirm the validity of information provided by consumers on a loan application. The information verified may include the consumer’s Social Security number, employment, and income.

Consumers may perceive certain fees, such as those for verification services and tax monitoring, as duplicative charges. For example, a loan applicant may ask why he/she is paying for verification services when the lender is receiving documents to verify employment, income, and assets. Tax monitoring fees may also appear to be redundant, particularly in those transactions in which a borrower is required to place funds in an escrow account in order to ensure that property taxes are paid. Loan originators should anticipate these questions by asking their lending managers for an explanation of the reason behind imposing particular charges.

Considerations of cost and efficiency are likely to be the reasons that a lender will impose fees for verification and tax monitoring services. For example, Equifax offers verification services, and because it can verify income and employment very quickly, a lender that uses this service can make a faster decision on a loan application.[1] As for tax monitoring services, lenders may justify this one-time fee on the basis of the critical information that the service produces. Even if funds for property taxes are held in escrow, the failure of a lender or servicer to pay the taxes can occur, and unpaid property taxes create the risk of a tax sale. A tax monitoring service can alert the lender of unpaid taxes before an action is initiated by a governmental entity. Savvy borrowers may ask their lenders to reduce or waive these fees, and loan originators should know the extent to which these fees are negotiable.

A loan applicant may also ask why he/she is not allowed to choose the provider for a particular service. For example, borrowers are rarely allowed to shop for the appraiser offering the valuation that a lender will use to make a credit decision. If a consumer asks why he/she is not allowed to make this choice, the originator can explain that lenders order their own appraisals to protect their investment in a mortgage. The appraisal provides assurance that the home used as security for a mortgage has sufficient value to support the loan amount. Consumers are free to order their own appraisals at an additional expense. This cost is one that they may decide to incur if the lender’s appraisal deviates significantly from a home’s anticipated market value.

[1] Housing Wire. “Equifax Delivers End-to-End Verification for Mortgage Lenders.” 1 Oct. 2015.https://www.housingwire.com/articles/35201-equifax-delivers-end-to-end-verification-for-mortgage-lenders

Although a title search is intended to identify any defects in a real estate title, a title abstractor or examiner may fail to uncover a defect. A lender’s title insurance policy protects its interests if future claims arise based on existing rights or claims that a title examiner failed to find. Lenders always require the purchase of a title insurance policy, and its cost is paid by the borrower with a single premium that is due when the closing takes place.

There are numerous provisions in the TRID Rule commentary on the disclosure of the cost of title insurance. Use of a special formula, which is discussed in a subsequent course section, is required when calculating the cost of title insurance for homeowners. The cost of a lender’s policy is disclosed without the adjustments that apply to cost calculations for an owner’s policy (Official Interpretations, 1026.37(f)(2)(4.)).

The lending manager at LL Mortgage Company is correct. Despite the fact that Sofia did not intend to violate the TRID Rule, her oversight meant that she failed to offer Allen a good faith estimate of closing costs, and she cannot correct her mistake with a revised Loan Estimate. Some circumstances justify revisions to Loan Estimates, but Sofia’s unintentional failure to include attorney’s fees in the estimated closing costs did not create an opportunity for her to prepare a revised Loan Estimate and to rely on it as a good faith estimate.

Even if Sofia offers Allen a revised Loan Estimate that lists a closing attorney as a service for which he can shop, doing so will not enable LL Mortgage Company to reset the tolerance for variances between the estimated and actual costs of Allen’s transaction, and will not prevent the fees for the closing attorney from being subject to a zero tolerance. With extensive commentary that supplements the TRID Rule provisions on revising estimated loan costs, the CFPB has emphasized that the ability to rely on a revised Loan Estimate as a good faith estimate is limited to situations involving “changed circumstances” (Official Interpretations, 1026.19(e)(3)(iv)(A)(1.)(iii.)). As discussed earlier, changed circumstances include extraordinary events, the receipt of new information, or the discovery that information relied on in the preparation of a Loan Estimate was inaccurate. Forgetting to include the services of an attorney on the original estimate of costs does not meet the TRID Rule’s standards for changed circumstances.

Offering Allen an option to “shop” for an attorney only two days prior to closing would not be a reasonable option for him and could potentially damage LL Mortgage Company’s good relationship with Allen since it draws attention to Sofia’s error. Lenders can select the services for which consumers can and cannot shop, and with no legal obligation to allow Allen to choose his own attorney, LL Mortgage Company is free to include the services of a closing attorney as services for which shopping is not permitted.

The potential legal consequences of Sofia’s error include:

· A private action by Allen, and

· An enforcement action by the CFPB

Actions brought by individuals are subject to monetary penalties of up to $4,000 (15 U.S.C. §1640). An enforcement action by the CFPB can lead to much more severe penalties because the Dodd-Frank Act has created three penalty tiers for violations of consumer financial protection laws and regulations. These include a $5,000 penalty for each day that a violation continues. Reckless violations are subject to a $25,000 penalty for each day that a violation continues, and knowing violations are subject to penalties of up to $1 million per day (12 U.S.C. §5565(c)). With the potential of incurring such steep penalties, the most prudent option for LL Mortgage Company is to avoid liability by absorbing the fee that Sofia failed to disclose.

If compliance managers at LL Mortgage Company discovered Sofia’s error after Allen’s closing occurred, there would still be an opportunity to avoid liability for failing to provide a good faith estimate of costs. The TRID Rule allows creditors to issue refunds for charges that exceed permitted variances. If a Loan Estimate fails to provide an accurate estimate of closing costs and a consumer pays an amount that exceeds the applicable tolerances, the creditor has 60 days from the date of consummation to refund the consumer for the excess payment. When this refund is made, the creditor is in compliance with the requirement to provide a good faith estimate of the costs associated with a lending transaction (12 C.F.R. §1026.19(f)(2)(v)).

The right side of page 2 of the Loan Estimate discloses “Other Costs,” such as fees and taxes imposed by state and local governments. Unlike “Loan Costs,” which are fees charged directly or indirectly by creditors, most of the fees listed as “Other Costs” are not imposed by creditors.

This distinction between loan costs and other costs is one that loan originators may want to point out to consumers who are astounded at the cost of securing a home loan. This distinction helps them to understand that many of the fees associated with a mortgage are not going into the pockets of lenders or settlement service providers. During a review of “Other Costs,” loan originators can explain that with the exception of charges for prepaid interest or optional credit insurance products, “…the creditor does not retain any of the amounts or portions of the amounts disclosed as other costs” (Official Interpretations, 1026.37(g)(1.)).

Government fees and taxes are unavoidable, but in a transaction involving a buyer and a seller, the loan applicant may be able to work out an agreement for the seller to assume some of these costs. These negotiations may also work out in favor of the seller. For example, in Allen’s fictitious transaction, he has agreed to pay a significant portion of the charges for transfer taxes even though it is customary in his state for the seller to cover this cost.

Taxes and other government fees include recording fees and transfer taxes. Recording fees are costs imposed by local government agencies to create a public record of the transfer of real estate from one owner to another. These fees are typically based on the number of pages in the recorded documents and the types of documents recorded.

Transfer taxes are charges that state and/or local governments impose when residential property is sold, and the amount is calculated as a percentage of the sales price or as a percentage of the property value. The terms used to describe these taxes may differ from one county or state to another, but regardless of the terminology, creditors must disclose transfer taxes on the Loan Estimate whenever a consumer is required to pay them (Official Interpretations, 1026.37(g)(1)(3.), (4.)). In a transaction involving a buyer and a seller, the transfer taxes are shown on the Closing Disclosure, and not on the Loan Estimate, if the seller is paying them.

Prepaid items include costs associated with homeownership that a creditor may ask a borrower to pay before the first mortgage payment and other mortgage-related expenses are due (12 C.F.R. §1026.37(g)(2)). At closing, a borrower will need to cover the cost of prepaid interest, which is the interest that accrues between consummation and the end of the month that the closing takes place. In addition to prepaid interest, lenders may ask borrowers to prepay all or a portion of the annual premiums for homeowner’s insurance and to make advance payments on property taxes. Certain transactions, such as those for FHA loans, may require payment of upfront mortgage insurance premiums.

The regulations are very specific about the order in which prepaid items must be listed on the Loan Estimate, but compliance with this detail is easy since the model form includes the prepaid items in the required order. If certain items are not prepaid, no amount is entered next to the prepaid items printed on the model disclosure. The regulations prohibit the removal of any information printed on the Loan Estimate, even if it is not relevant to a particular transaction. Creditors may add up to three additional items under the “Prepaids” subheading (12 C.F.R. §1026.37(g)(2)(vi)). These items could include optional insurance products such as home warranty insurance or single-premium credit, life, or disability insurance that is paid in full at the time of closing.

While all transactions will not include prepaid amounts for homeowner’s insurance and property taxes, most will include prepaid interest. The amount of prepaid interest that is due at closing is calculated by multiplying the per diem or per day interest for a mortgage by the number of days remaining in the month that the closing occurs. The number of days is measured from the date of consummation. In order to calculate the per diem interest, loan originators multiply the loan amount by the interest rate. The product is divided by 365 to determine the per diem interest. This amount is multiplied by the number of days from the date of closing (counting the closing date) until the end of the month.

(Loan Amount) x (Interest Rate) = Z
(Z) ÷ (365) = (Per Diem Interest)
(Per Diem Interest) x (Number of Days from Closing) = (Prepaid Interest)

Lenders typically require the establishment of an escrow account when a borrower makes a down payment of less than 20%. Amounts deposited into escrow may include payments for homeowner’s insurance, PMI, and property taxes. The model disclosure includes each of these items in alphabetical order.

As with other items printed on the Loan Estimate that are not relevant to a particular transaction, the removal of these is prohibited. For example, if Allen made a larger down payment and lowered his LTV ratio to 70%, LL Mortgage Company would not ask him to purchase PMI. Furthermore, he might not be asked to make monthly payments into an escrow account for the costs of property taxes and insurance since he would not be likely to risk his cash investment of $30,000 by failing to pay these expenses. Allen’s Loan Estimate would still include these items, which are printed on the model form, but with no need for PMI or for the establishment of an escrow account, the disclosure would not show any amounts next to them.

While creditors may not delete any text printed on the model disclosure, they may add up to five additional items under the subheading for “Initial Escrow Payment at Closing” (12 C.F.R. §1026.37(g)(3)(v)).

The items listed beneath the subheadings for “Prepaids” and “Initial Escrow Payment at Closing” are almost identical; both include disclosures related to homeowner’s insurance, mortgage insurance, and property taxes. A loan applicant that takes the time to read his/her Loan Estimate is likely to ask why amounts related to these charges are included twice. A loan originator should be prepared to offer an explanation.

Homeowner’s Insurance: payments of homeowner’s insurance that are disclosed as “Prepaids” and insurance payments that are disclosed under “Initial Escrow Payment at Closing” are different payments that serve different objectives. Homeowner’s insurance protects the interests of consumers and creditors, and premiums are due in advance of the extension of coverage. Failure to pay the premium will result in the cancellation of coverage, placing the interests of the borrower and the creditor at risk. A borrower will have an obligation under a lending contract to maintain insurance, but if he/she allows coverage to lapse, the creditor or loan servicer will secure force-placed insurance, which usually costs the borrower more than the lapsed coverage cost. To ensure that none of these issues arise during the first year of a loan’s term, creditors may require an advanced payment of amounts ranging from premiums for two months of coverage to the full cost of coverage for an entire year.

Payments for homeowner’s insurance that are listed as an “Initial Escrow Payment at Closing” are not advance payments of insurance premiums. Instead, these payments are used to create a “cushion” or a reserve that will protect the interests of the borrower and the creditor in the event that premiums increase.

RESPA and Regulation X limit the reserve funds that a creditor may require borrowers to hold in an escrow account to cover unanticipated disbursements. The limit is 1/6 of the estimated total annual payments from the escrow account (12 C.F.R. §1024.17(c)(1)(i)). Since 1/6 of total annual payments represents the cost of premiums for two months of coverage, it is logical for creditors to ask borrowers to pay this amount at closing in order to establish the “cushion” that is permitted by law.

Property Taxes: as previously discussed, property taxes are a significant concern for mortgage lenders. A borrower’s failure to pay these taxes may lead to a tax sale, and the proceeds are used to pay unpaid taxes before any amount is paid for the borrower’s mortgage debt. A foreclosure will lead to the same result, with unpaid property taxes paid prior to any payments on mortgage debt, including amounts owed on a first-lien mortgage. To protect themselves from this risk, creditors may require borrowers to place funds in an escrow account to cover a portion of the taxes.

If a creditor requires a borrower to arrive at closing with funds for placement in an escrow account for property taxes, RESPA limits the size of the reserve to 1/6 of total annual payments. Like amounts deposited as a reserve for homeowner’s insurance, the amount for property taxes will represent the amount owed over the course of two months.

Mortgage Insurance: mortgage insurance includes PMI or mortgage insurance associated with nonconventional mortgages, such as FHA loans. If a consumer is applying for an FHA loan, an upfront mortgage insurance premium is due at closing and should be listed as a prepaid item. PMI may also be listed as a prepaid item if the borrower decides to purchase single-premium mortgage insurance instead of making monthly payments for PMI.

Creditors are likely to require borrowers to place funds in an escrow account to cover the cost of homeowner’s insurance and property taxes because these costs may increase over time and become more difficult to pay. Escrow accounts help to ensure that borrowers allocate funds each month to cover these costs. While creditors pay PMI from an escrow account, they are unlikely to demand a reserve because the cost is not subject to an increase and is eliminated when a borrower’s principal balance reaches 78% of the original value of the home. Some creditors may require a small reserve to cover renewal premiums. The elimination of MIP for FHA loans is also possible if the borrower’s LTV ratio at the time of purchasing a home was 90% or less. Since the cost of mortgage insurance is not one that borrowers must pay throughout a loan’s term, there is a reduced likelihood that borrowers will fail to make these payments.

The TRID Rule states that the subcategory for “Other” is reserved for the itemization of any other amounts in connection with the transaction that a consumer will pay to an entity or individual other than the creditor or loan originator (12 C.F.R. §1026.37(g)(4)). Creditors are required to list these charges if they are aware of them when they issue the Loan Estimate. Fees listed in this subcategory may include:

· Commissions for real estate brokers

· Charges from homeowner’s associations or condominium charges related to the transfer of ownership

· Payments to the seller for personal property that the borrower will purchase with the home

· Fees for inspections not required by the creditor

· Optional insurance products that are not single-premium products, but those for which premiums will be paid on a monthly basis

· Title insurance for the borrower

(Official Interpretations, 1026.37(g)(4)(4.))

Any optional insurance products listed in this section of the Loan Estimate must be followed by a parenthetical notation that the product is “optional” (12 C.F.R. §1026.37(g)(4)(ii)).

Items listed in subsection H are not subject to tolerance limits. Therefore, if an actual charge exceeds its estimated cost, a creditor has not violated its obligation to offer a good faith estimate. When preparing a Loan Estimate, creditors may not be aware of every optional product or service that a consumer will purchase, so the failure to list unknown items and their costs does not mean that a Loan Estimate is not offered in good faith.

Lenders will not require a loan applicant to purchase an owner’s title insurance policy as a condition for loan approval, but in some jurisdictions, it is common for sellers to purchase owner’s coverage, although even if the purchase of title insurance is not required by a lender or offered by a home seller, homebuyers should secure coverage.

Loan applicants are likely to ask why they should purchase title insurance for themselves since they are already required to purchase it for their lender. Originators can respond to this question by explaining that the lender’s policy will not protect the interests of the borrower if a title defect is uncovered after closing. Furthermore, title insurance is a good investment since the policy is purchased with the payment of a single premium, and coverage lasts for as long as the borrower or his/her heirs have an interest in the property.

When a loan applicant chooses to purchase an owner’s policy for title insurance, the originator must label it as “optional” (12 C.F.R. §1026.37(g)(4)(ii)). The staff commentary to the TRID Rule includes special requirements for disclosing the price of owner’s title insurance, and these requirements are related to:

· The consumer’s purchase of “enhanced” rather than basic coverage, and

· The consumer’s simultaneous purchase of lender’s and owner’s title insurance

The TRID Rule was written to discourage creditors from underestimating closing costs, but the rules that determine how to disclose the cost of enhanced title insurance and simultaneous lender/owner coverage encourage the use of low estimates. With the use of price-estimation strategies that underestimate the cost of an owner’s policy, the TRID Rule encourages consumers to protect themselves with the purchase of title insurance.

As its name suggests, “enhanced” coverage offers benefits in addition to those offered by basic or standard title insurance. The CFPB instructs creditors and loan originators to disclose the cost of an owner’s policy using the premium for basic coverage and not the premium for enhanced coverage. There is one exception to this rule; when a sales contract requires the homebuyer to purchase “enhanced” coverage, the Loan Estimate should include the more expensive premium if the requirement is known to the creditor when issuing the Loan Estimate (Official Interpretations, 1026.37(g)(4)(1.)).

Title insurance is available to consumers at a discounted rate when they simultaneously purchase a lender’s and an owner’s policy for the same property. This discount is usually applied to the cost of the lender’s coverage, but the CFPB requires the application of the discount to the cost of the owner’s policy for the purpose of disclosing the cost of coverage. This rule accomplishes the following two purposes:

· If a borrower decides not to purchase an owner’s title insurance policy when purchasing a lender’s policy, he/she will be prepared to pay the full price for the lender’s policy since this is the price that the Loan Estimate will show

· The borrower will see that for a relatively small amount of money, he/she can purchase owner’s title insurance as well as lender’s insurance

When a discount for simultaneous purchases is available, the costs are disclosed as follows:

· The creditor must disclose the cost of the lender’s policy based on the full premium rate

· The creditor must disclose the simultaneous owner/lender premium rate by adding the full cost of the premium for the owner’s policy to the discounted cost for the simultaneous lender’s policy and then deducting the full cost

(Official Interpretations, 1026.37(g)(4)(2.))

This method for cost disclosure helps loan applicants to understand the incremental cost of purchasing an owner’s policy at the same time as a lender’s policy. The CFPB was concerned that showing the full premium for a separately purchased owner’s policy would discourage borrowers from considering a policy to protect their own interests.

Loan originators must calculate and disclose the “Total Closing Costs” by adding the “Total Loan Costs,” shown on the left side of page 2 of the disclosure, to the “Total Other Costs” shown on the right side of the page. In transactions in which lender credits are a factor, the amount of credit is subtracted from the total amount of closing costs and other costs. If there are no lender credits, the loan originator must keep the words “Lender Credits” on the disclosure and leave the space next to this entry blank.

Creditors may offer lender credits to borrowers who do not have sufficient cash to cover closing costs. A borrower secures this credit by paying a higher interest rate.

The TRID Rule includes provisions that are intended to ensure that consumers who opt for lender credits get corresponding reductions in closing costs. Like other amounts disclosed on the Loan Estimate, lender credits must be disclosed in good faith. In the case of lender credits, this means that if a creditor reduces the amount of credits promised on the Loan Estimate, the reduction has the same effect as increasing a charge that is subject to a zero tolerance for variances between estimated and actual costs.

Creditors must be careful when offering consumers a lender credit to pay a specific fee. Using the example of a creditor that extends a lender credit of $750 to cover the estimated cost of an appraisal, the CFPB describes how differences between the estimated and actual cost of the appraisal impacts the lender credit. If the cost of the appraisal increases to $900, the creditor must increase the lender credit by $150 to cover the entire cost. If the actual cost of the appraisal is $700 instead of $750, the lender cannot reduce the lender credit to $700 because this reduction in the credit would constitute a failure to offer a Loan Estimate in good faith (Official Interpretations, 1026.19(e)(3)(i)(5.)).

The requirements related to the disclosure of lender credits are confusing. For example, as shown in the foregoing paragraph, the use of lender credits to cover a specific fee can lead to compliance concerns. However, the Loan Estimate will not indicate the specific fee that a lender credit is intended to cover because the lender credits that are shown on the estimate are the sum of “non-specific lender credits” and “specific lender credits” (Official Interpretations, 1026.19(e)(3)(i)(5.)). Credits for specific fees are listed on the Closing Disclosure in the table for “Closing Cost Details” where they are shown as a cost that is “Paid by Others” (Official Interpretations, 1026.38(h)(3)1.)).

The TRID Rule does not contain any time limitations on the disclosure of lender credits. In fact, creditors may wait until they prepare a Closing Disclosure to extend a credit. The ability to offer and disclose lender credits on a Closing Disclosure allows creditors to use lender credits to offset charges that exceed permitted variances between actual and estimated charges. Lender credits are even permitted after the closing for a loan occurs if an excess charge to the consumer is discovered after consummation and a refund is provided (Official Interpretations, 1026.38(h)(3)(2.)).

The final entries on the second page of the Loan Estimate include the estimated amount of cash that a consumer will need for closing and an itemization of the amounts that are used to calculate this total. The itemized amounts include the following (12 C.F.R. §1026.37(h)).

Total Closing Costs: these are the “Total Loan Costs” + “Total Other Costs” – “Lender Credits,” the amount of which is disclosed in subsection J.

Closing Costs Financed: creditors may allow consumers who are short on cash to finance a portion of their closing costs. However, if the loan is for a high-cost mortgage, the financing of points and fees is illegal under the federal Home Ownership and Equity Protection Act (HOEPA).

Down Payment/Funds from Borrower: a down payment is defined as the difference between the purchase price of the property and the principal amount of the loan.

Deposit: in purchase transactions, a deposit is the earnest money that is held in escrow until consummation occurs. When a deposit is made and held in an escrow account, it is shown as a negative number. This amount will ultimately be used to cover a portion of the down payment, which is disclosed as a positive number.

Funds for Borrower: this is an amount that is disclosed in lending transactions that do not involve the purchase of real estate. For example, this disclosure would be relevant in a cash-out refinance. In purchase transactions, such as Allen’s, the amount listed next to “Funds for Borrower” is $0.

Seller Credits: the seller credits that are disclosed on the Loan Estimate are those that are “reasonably known” to the creditor at the time that a Loan Estimate is provided. A loan originator will know about these credits from a review of the sales contract or from verbal information provided by the consumer or the real estate agent. If the seller credits are for specific charges, the loan originator should add them together and show the aggregate amount of seller credits on the Loan Estimate.

Adjustments and Other Credits: the amounts shown here may include funds from individuals who are not parties to the transaction. For example, loan originators may use this entry to show that a loan applicant is receiving a gift from a family member or that a home builder is providing a homebuyer with a credit. Lender credits and seller credits are not disclosed in this section.

Page 3 of the Loan Estimate is the last page of the disclosure, and it gives loan applicants information that they can use when comparing loan options offered by different lenders. It also provides a series of brief disclosures that become due when a creditor receives a loan application. The first information that this page includes is contact information and NMLS licensing numbers for the loan originator and the creditor or mortgage broker that is providing the Loan Estimate.

One of the goals of offering consumers a simplified and integrated Loan Estimate is to encourage them to comparison shop for a mortgage. The “Comparisons” table on page 3 offers four pieces of information that consumers can use for this purpose.

The first two items on the table offer a snapshot of a loan in the fifth year (the 60th month) of the loan term by showing:

· The total amount of principal, interest, mortgage insurance, and loan costs that a consumer will pay in the first five years of a loan’s term, and

· The amount paid to reduce the principal during the first five years

Most consumers are surprised to realize what a small percentage of their monthly payments is used to reduce the principal of their loan during the early years of a loan’s term.

The third item shown on the comparisons table is the APR, with language clarifying that the APR is not the same as the interest rate for the loan.

The fourth and final item shown on the table is the total interest paid over the full term of a loan, expressed as a percentage of the loan amount (12 C.F.R. §1026.37(l)(3)). When calculating the “Total Interest Percentage” (TIP), creditors assume that the consumer will make full and on-time payments, and will make no additional payments (Official Interpretations, 1026.37(l)(3)(1.)).

The TIP is usually much greater than many consumers expect it to be, especially for loans with 30-year terms. The disclosure of TIP, coupled with the disclosure showing how little a loan’s balance is reduced during the first five years, can motivate some consumers to consider other products. A popular option is a 15-year mortgage, which enables borrowers to begin making larger payments towards principal in the early years of repayment and to reduce the total amount of interest paid.

For example, assume that Allen is approved for a loan with a fixed interest rate of 3.5%. With monthly principal and interest payments of $763.38, his total interest payments at the end of the 30-year loan term would total $104,816, which represents 38% of his payments. Seeing how much he would pay towards interest could motivate him to look into a 15-year mortgage, which would reduce the total amount of interest paid to $48,754.

The Loan Estimate reduces paperwork and facilitates compliance with other disclosure requirements by incorporating four additional disclosures required by Regulation Z and one that is required by the Equal Credit Opportunity Act (ECOA). These are presented on page 3 of the Loan Estimate as “Other Considerations.” Following is a review of the information disclosed to consumers in this section of the Loan Estimate (12 C.F.R. §1026.37(m)).

Appraisal: this additional disclosure states that:

· Creditors may charge loan applicants for an appraisal of the home used to secure a mortgage

· Creditors must “promptly” provide loan applicants with a copy of the appraisal, even if the transaction is not completed

· Consumers may pay for an additional appraisal for their own use

This section of the Loan Estimate satisfies disclosure requirements that are found in ECOA and Regulation B, as well as provisions found in Regulation Z that apply to higher-priced mortgage loans. Regulation B states that, in transactions for first-lien loans secured by a dwelling, creditors must mail or deliver notice of the right to an appraisal copy to a loan applicant no later than the third business day after receipt of a loan application (12 C.F.R. §1002.14(a)(2)). Regulation Z requires delivery of a similar notice in all transactions for higher-priced mortgage loans, regardless of the loan’s lien status (12 C.F.R. §1026.35(c)(5)).

Assumption: assumption of a mortgage occurs when a borrower does not apply for his/her own loan, but assumes the remaining mortgage payments and other obligations associated with the seller’s mortgage. Conventional loans are generally not assumable, but non-conventional products such as FHA loans and VA loans are. The Loan Estimate must indicate whether the remaining loan balance is assumable.

Homeowner’s Insurance: creditors may remind consumers that they are required to carry homeowner’s insurance and that they may choose an insurer that is deemed acceptable by the creditor. This disclosure is at the option of the creditor and is not required by law.

Late Payment: a simple statement on the Loan Estimate advises consumers of the number of days past the due date that a late payment will trigger a late fee and the amount of that fee.

Refinance: the Loan Estimate includes a disclosure advising consumers that after securing a mortgage, future refinancing will depend on their eligibility for mortgage credit, valuation of the property securing the loan, and market conditions.

Servicing: the Loan Estimate must indicate whether the creditor intends to service the mortgage or transfer servicing rights to another entity.

Creditors are not required to confirm a loan applicant’s receipt of a Loan Estimate 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.” If a signature is not required, the disclosure must include a statement under the “Other Considerations” subsection advising consumers that the receipt of a Loan Estimate does not obligate them to accept a loan (12 C.F.R. §1026.37(n)).

The heading at the top of page 1 of the Loan Estimate advises applicants to:

A. Shop around for the best product

B. Provide only truthful and accurate information to the loan originator with whom you are working

C. Do not sign this Loan Estimate without carefully reviewing it

D. Save this Loan Estimate to compare with your Closing Disclosure

Which of the following appraisal-related disclosures appears on page 3 of the Loan Estimate?

A. Creditors will provide three copies of each appraisal conducted

B. Loan applicants may pay for an additional appraisal for their own use

C. Loan applicants will only receive a copy of an appraisal if they request one

D. Creditors may not charge loan applicants for an appraisal

Which of the following is not one of the three sections that comprise page 1 of the Loan Estimate?

A. Loan Terms

B. Projected Payments

C. Other Costs

D. Costs at Closing

The Loan Estimate divides the cost of settlement services into which two categories?

A. Services You Cannot Shop For and Services You Can Shop For

B. Costs Paid Prior To Closing and Costs Paid At Closing

C. Lender-Required Services and Optional Services

D. Estimated Costs and Final Costs

When listing origination charges on the Loan Estimate, which of the following must be listed first?

A. Underwriting fee

B. Application fee

C. Processing fee

D. Discount points

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