Chapter 12: Closing a real estate transaction Pt. 2

Timing of Special Information Booklet

A mortgage loan originator must present the special information booklet to a borrower at the time a completed written application is submitted, or no later than three business days after the application is received. The special information booklet is not required for the following: Refinances Junior loans Reverse mortgages Although they are not required by law to do so, many real estate brokers provide prospective buyers with a copy of the special information booklet Your Home Loan Toolkit when they start their home search. Even before they meet with a lender, a prospective buyer can use the Toolkit to get a good idea of how much of a mortgage they can afford, which will help them focus their search for a new home.

The LE and Yield Spread Premiums

A yield spread premium (YSP) is a fee paid by a lender to a mortgage broker for making a loan with an above-market interest rate. The lender receives a higher yield from the higher interest rate. A YSP must be disclosed to the borrower on the Loan Estimate. The borrower must be given a credit against loan origination fees for the full amount of the YSP to lower the upfront cash out-of-pocket expenses at closing for the borrower in exchange for higher monthly out-of-pocket payments required by the higher interest rate. Yield spread premiums shift the timing of the out-of-pocket fees that a borrower pays to a lender for the privilege of getting a loan—such as origination fees, broker fees, or discount points—but with YSP, the borrower pays less out-of-pocket upfront and more out-of-pocket later in the form of a higher rate of interest.

Settlement Services

An important purpose of RESPA is to ensure that consumers have choices when selecting settlement services, which are defined as any service provided in connection with a prospective or actual settlement. It's important to understand that RESPA prohibits a "required use" of specific settlement service providers (with some exceptions for lenders). Please take a moment to scroll through the list of common settlement services: Services by a real estate broker to make sure that transaction details have been taken care of so that the closing proceeds smoothly (e.g., appraisals, repairs made and/or credits agreed to, utility services transferred or setup, condominium move in and out fees paid and paperwork completed, final walk-through, etc.) Any services related to the origination, processing, underwriting, or funding of a mortgage loan, including service by a mortgage broker Title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies Services by an attorney, which may include review and modification of the purchase agreement, negotiation of repairs and/or repair credits, review of title commitment and affidavit of title, calculation of tax prorations, verification of a water certificate, paid assessment letter for condos, FIRPTA (Foreign Investment in Real Property Tax Act) document, and correct property description on the deed Preparation of documents, including notarization, delivery, and recordation Rendering of credit reports and appraisals Inspections, including inspections required by applicable law or any inspections as part of the attorney/inspection review contingency, which is part of the sales agreement or mortgage documents before transfer of title Conducting of settlement by a settlement agent and any related services Services involving mortgage, hazard, flood, or other casualty insurance or home warranties Services involving real property taxes or any other assessments or charges on the real property Any other services for which a settlement service provider requires a borrower or seller to pay

Key Terms

Annual Percentage Rate (APR)—Relationship between the cost of borrowing and the total amount financed, represented as a percentage. Business Day—Under federal law for the purposes of the TRID rule, all calendar days except Sundays and these legal public federal holidays: New Year's Day; Martin Luther King Jr. Day; Washington's Birthday; Memorial Day; Independence Day; Labor Day; Columbus Day; Veterans Day; Thanksgiving Day; Christmas Day. Closing Disclosure—A standardized document that presents a final, detailed accounting for a real estate transaction, listing each party's debits and credits and the amount each will receive or be required to pay at closing; required for all RESPA-related transactions. Also called Settlement Statement. Credit—A sum of money that is to be received. Debit—A sum of money that is owed; a charge. Loan Estimate—The disclosure of loan terms, annual percentage rate and other credit costs, and estimated settlement costs that must be given to borrowers within three business days of a completed loan application in order to satisfy provisions of the Truth in Lending Act and the Real Estate Settlement Procedures Act. Rate Lock—A specific fixed interest rate for a specified amount of time that is guaranteed by the mortgage lender. TRID Rule—The TILA-RESPA Integrated Disclosure rule, issued by the Consumer Financial Protection Bureau to create standardized, consumer-friendly disclosure documents, including the Loan Estimate and the Closing Disclosure.

Changed Circumstances: Borrower Requested Changes

Another valid basis for revision includes a borrower-requested change to the interest rate or loan terms. For example, after applying for a loan and seeing the LE, the borrower agrees to a higher interest rate on the loan in exchange for lower initial closing costs. This increase would affect the Loan Estimate, but because the change is borrower-initiated, a valid basis for revision exists. A Loan Estimate could also require revision if the borrower does not initially lock an interest rate but does so after the Loan Estimate is delivered. Also, if a borrower obtains a Loan Estimate from a mortgage loan originator and does not provide an intent to proceed, the creditor may issue a revised Loan Estimate if the borrower returns after the expiration date of the Loan Estimate. Once a lender determines that a valid changed circumstance or another basis for revision exists, the lender must provide a set of revised disclosures, including a revised Loan Estimate, within three business days of receiving information sufficient to make that determination.

Timing of the TRID Disclosures: LE

As mentioned earlier, the Loan Estimate must be given to the borrower, placed in the mail, or transmitted electronically no later than three business days after the lender receives the borrower's completed application. Under the provisions of the Mortgage Disclosure Improvement Act, which amended the Truth in Lending Act, the earliest a loan may close is the seventh business day after the initial Loan Estimate is provided to the borrower. For the purposes of the TRID disclosure requirements, federal law defines a business day to be all calendar days except Sundays and these legal public federal holidays: New Year's Day The birthday of Martin Luther King, Jr. Washington's Birthday Memorial Day Independence Day Labor Day Columbus Day Veterans Day Thanksgiving Day Christmas Day North Carolina law does not consider Saturdays as business days.

CFPB Enforcement Authority

As part of its enforcement authority, the CFPB: Engages in investigations and requests information from covered persons. Issues subpoenas or civil investigative demands. Conducts hearings and adjudication proceedings. Commences civil actions in federal court seeking any appropriate or equitable relief against individuals and entities that violate federal consumer financial laws.

Changed Circumstances as a Basis for LE Revisions

As set forth by Regulation Z, which implements the Truth in Lending Act, the Loan Estimate must be given to the borrower, placed in the mail, or transmitted electronically no later than three business days after the lender receives the borrower's completed application. Once the Loan Estimate has been issued, there must be a valid "changed circumstance" to trigger the need to issue a revised LE. A changed circumstance could be any of the following: An event that is beyond the control of the lender or the borrower that occurs, such as a natural disaster in the property's community, which results in increased settlement costs. Information that was known or provided at the time of the application changed subsequent to the application and caused a change in the initial loan terms, interest rates, or settlement service provider charges; for example, a third-party provider ceases to be in business and the lender is forced to seek services from another source that charges an increased fee. New information regarding the borrower or the loan that the lender did not rely on when supplying the Loan Estimate, such as if a borrower becomes unemployed before closing. The borrower becomes ineligible for an estimated charge previously disclosed because of the creditworthiness of the borrower or the value of the security for the loan, as when the appraisal comes in below the purchase price. Lenders also may use a revised Loan Estimate where the transaction involves financing of new construction and the lender reasonably expects that settlement will occur more than 60 calendar days after the original Loan Estimate has been provided.

Special Information Booklet

As we just discussed, to comply with CFPB's Know Before You Owe disclosure initiative, lenders must provide a copy of the special information bookletentitled Your Home Loan Toolkit: A Step-by-Step Guide to borrowers who apply for a purchase loan secured by real property. This special information booklet is divided into several sections and is designed to be used in connection with the Loan Estimate and Closing Disclosure forms. A workbook that allows borrowers to define what is affordable, understand the impact of credit scores, contrast different mortgage options and the implications of each, choose the right down payment, understand the trade-off between points and interest rate, and compare terms from multiple lenders. Guidelines for navigating the closing process and selecting settlement services, including finding a closing agent, title insurance, home inspectors and appraisers. A page-by-page explanation of the Closing Disclosure, which is the five-page document that gives borrowers more details about their loan, its key terms, and how much they are paying to close the transaction. Advice for homeowners on how to protect their properties and prevent loan default. The CFPB also provides an electronic version complete with fillable text fields and interactive checkboxes so the consumer can save and print their progress as they work through the Toolkit. The electronic version meets federal accessibility standards to ensure that all consumers, including those with disabilities, can use the resource.

Relationship to Closing Disclosure Form

As we've discussed, the Loan Estimate is designed to provide an accurate estimate of all settlement provider charges the borrower can expect to incur during the term of the loan and at loan consummation. Lenders must ensure that the figures stated in the Loan Estimate are made in good faith and are consistent with the best information reasonably available to the lender at the time they are disclosed. Whether a Loan Estimate was made in good faith is determined by calculating the difference between the estimated charges originally provided in the Loan Estimate and the actual charges paid by or imposed on the borrower at loan closing as included on the Borrower Closing Disclosure (BCD). The general rule is that if the closing costs on the Closing Disclosure are: Greater than what was disclosed initially on the Loan Estimate, within certain tolerances, the Loan Estimate is assumed to NOT be made in good faith. Less than what was disclosed initially on the Loan Estimate, the loan originator is assumed to have acted in good faith when making the initial Loan Estimate. However, the charges and fees for settlement services listed on the Loan Estimate are subject to tolerance limits for the actual costs included on the Closing Disclosure. So a lender may have been acting in good faith when issuing a Loan Estimate even if the actual costs on the Closing Disclosure were higher.

Closing Disclosure Changes

As we've discussed, the lender is required to provide a Closing Disclosure with the actual terms of the transaction before loan consummation. If the terms on the Closing Disclosure are determined to be inaccurate, regardless of the circumstances, the lender will be required to issue a corrected Closing Disclosureto the borrower. There are four categories of changes affecting the Closing Disclosure: Changes before loan consummation NOT requiring a new waiting period Changes before loan consummation that DO require a new waiting period Changes due to events occurring AFTER loan consummation Changes due to clerical errors, for example, an incorrect loan servicer address

APR Accuracy and Redisclosure

As we've just seen, there may be circumstances that result in a change to the annual percentage rate (APR) that is associated with a loan. According to Regulation Z, which implements the Truth in Lending Act, the APR is generally considered accurate if it does not vary above or below that initially disclosed on the Loan Estimate by more than: 1/8% (0.125) for a regular transaction, such as a fixed-rate loan. 1/4% (0.250) for an irregular transaction, which is one that includes multiple advances (such as with a home equity line of credit), irregular payment periods, or irregular payment amounts. If a change to the interest rate or loan fees renders the APR inaccurate beyond these limits prior to loan consummation, the borrower must receive redisclosure of all terms in a corrected Loan Estimate. Once the Closing Disclosure has been provided to the borrowers, however, a revised Loan Estimate may not be given to the borrower. Any changes that meet the threshold for redisclosure would have to be disclosed in a corrected Closing Disclosure, not a new Loan Estimate.

Part 2 Chapter Overview

As you learned in Part 1 of this chapter, closing is the process by which ownership of real property or title to the property is passed from seller to buyer. In Part 2 of this chapter, we will look more closely at the federal law that governs so much of the closing process: The Real Estate Settlement Procedures Act, more commonly known as RESPA. We'll look at the disclosure requirements of RESPA and the federal Truth in Lending Act, more commonly known as TILA, as we walk through the Loan Estimate (LE) and the Closing Disclosure (CD). Together, these two critical documents are known as the TILA-RESPA Integrated Disclosures, or TRID disclosures. While you, as a broker, are not required to complete these documents, you absolutely must be familiar with them. Chapter Outline and Objectives This section is divided into two units and a chapter quiz: The Real Estate Settlement Procedures Act (RESPA) TRID Disclosures After completing this section, you will be able to: Recall key provisions of the Real Estate Settlement Procedures Act. Describe the purpose of the Loan Estimate and Closing Disclosure documents and the information they contain.

Sample Buyer Closing Disclosure (BCD)

Before we continue, please download a sample Closing Disclosure and save, print, or keep open for reference as we walk through each page to see what information it contains. You might want to have your copy of the sample Loan Estimate available as well since we will compare them. Note that we will be looking at the five-page Closing Disclosure that a borrower/buyer would receive, listing the actual charges associated with the loan and the real estate transaction. As mentioned in the previous unit, the lender may prepare, or allow the settlement officer to prepare, a separate Closing Disclosure for the seller that includes only the two pages that detail closing costs affecting the seller (Page 2 and Page 3).

Sample Loan Estimate (LE)

Before we continue, please download a sample Loan Estimate and save, print, or keep open for reference as we walk through each page to see what information it contains.

Required Disclosures Under RESPA

Both the Real Estate Settlement Procedures Act and the Truth in Lending Act require lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the loan and the real estate settlement process. Such disclosures are intended to protect consumers from unfair lending practices. To assist your buyer clients and customers, it's helpful to understand the disclosure requirements of RESPA and TILA regarding settlement services that must be provided to the borrower: At the time of a completed loan application, Before settlement, At settlement, and After settlement. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices, and describe business relationships between settlement service providers. According to RESPA, a completed loan application must include the following six pieces of information: 1. The consumer's name; 2. The consumer's income; 3. The consumer's Social Security number to obtain a credit report (or another unique identifier if the consumer has no Social Security number); 4. The property address; 5. An estimate of the value of the property; 6. The mortgage loan amount sought.

Charges Subject to a 10% Cumulative Tolerance

Charges for third-party services and recording fees paid by or imposed on the borrower are grouped together and subject to a 10% cumulative tolerance. This means the lender may charge the borrower more than the amount disclosed on the Loan Estimate for any of these charges so long as the total sum of the charges added together does not exceed the sum of all such charges disclosed on the Loan Estimate by more than 10%. This includes fees for services that the borrower is allowed to choose, such as title and closing agent fees, owner's title insurance premiums, pest inspection report, location survey, etc., and recording fees. When a borrower chooses a provider that is NOT on the lender's written list of providers, then the lender is not limited in the amount that may be charged for the service. For purposes of determining the 10% tolerance level, the charge is removed from consideration.

Reserve Account Limitations

During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month, the lender may require a borrower to pay into the escrow account no more than 1/12th of the total of all disbursements payable during the year (one month), plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion not to exceed an amount equal to 1/6th of the total disbursements for the year (two months).

Closing Disclosure (CD)

For all loans that are subject to the provisions of the TILA-RESPA Integrated Disclosure Rule and that proceed to the closing, lenders must deliver a document called the Closing Disclosure (CD) to borrowers at least three business days prior to loan consummation. This disclosure provides the borrower with information about the actual loan terms and settlement service provider charges incurred in an easy-to-read and understand format. It allows the borrower to question loan terms or settlement charges before signing the final loan documents. Note that the term "consummation" differs from the term "closing" under the provisions of RESPA. Consummation is defined as the date when the consumer becomes contractually obligated to the creditor on the loan. This may not be the same day that the borrower is obligated to the seller in a purchase transaction, although generally, the loan and the transfer of title are handled at the same time. Before the implementation of the TILA-RESPA Integrated Disclosure (TRID) Rule, the disclosure of loan terms and settlement costs as required by the Truth in Lending Act and RESPA was handled with two separate disclosures called the HUD-1 Settlement Statement and the final Truth in Lending (TIL) statement.

Closing Disclosure: Responsibility for Completion

For any given transaction, there will likely be two Closing Disclosures, one prepared for the buyer—the Buyer Closing Disclosure or BCD—and one prepared for the seller—the Seller Closing Disclosure or SCD—with each showing only the terms, charges, and bottom line relevant to that particular party. This is done to protect the privacy of both buyer and seller in compliance with the federal Gramm-Leach-Bliley Act. Lenders can share the responsibility for completion and accuracy of a Closing Disclosure with a settlement agent, although the lender is ultimately responsible for ensuring that the Closing Disclosure is prepared accurately and delivered to a borrower at least three business days prior to loan consummation. There is no requirement to deliver a Closing Disclosure to a seller within this timeframe, as long as the seller receives a Closing Disclosure at settlement. We'll look at the Closing Disclosure in more detail in the next unit. When a transaction is NOT subject to the provisions of the TRID Rule, such as a cash transaction or a home equity line of credit, a settlement agent or lender may choose to use the standardized Closing Disclosure form to document the settlement charges for the sake of convenience.

Charges That May Exceed the Disclosed Amount

For certain costs or terms, lenders are permitted to charge borrowers more than the amount disclosed on the Loan Estimate without any tolerance limitation. However, lenders may only charge borrowers more than the amount disclosed when the original estimated charge (or lack of an estimated charge) was based on the best information reasonably available to the lender at the time the disclosure was provided. Charges that may exceed the amount on the Loan Estimate include: Charges made in good faith that may exceed the disclosed amount include prepaid interim mortgage interest, property or flood insurance premiums, and amounts placed into an escrow, impound, reserve, or similar account such as property taxes. Charges paid to third-party service providers for services not required by the lender. Services required by the lender if the lender permits the borrower to shop and the borrower selects a third-party service provider who is not on the lender's written list of service providers.

Loan Estimate (LE)

For closed-end credit transactions secured by real property (other than reverse mortgages), loan originators are required to provide a borrower with a good-faith estimate of credit costs and transaction terms on the Loan Estimate (LE) disclosure. The Loan Estimate must include the critical data a borrower needs to shop for settlement services and determine the best loan, for example: The date through which the specific interest rate for the loan is available A concise summary of terms of the loan, including the annual percentage rate (APR) Whether the interest rate can rise under certain circumstances Whether the lender requires an escrow account for taxes or other charges such as hazard insurance The total estimated settlement charges, which is generally the amount of money necessary to bring to settlement in addition to funds for the down payment Before the implementation of the TILA-RESPA Integrated Disclosure (TRID) Rule, the disclosure of loan terms as required by the Truth in Lending Act and RESPA was handled with two separate disclosures called the Good Faith Estimate (GFE) and the initial Truth in Lending (TIL) statement.

Timing of the TRID Disclosures: BCD

However, it's also critical to remember that the borrower must receive the Closing Disclosure at least three business days prior to the loan consummation date. If the Closing Disclosure is: Delivered in person, it is considered to be received the day it is provided. Mailed or delivered electronically, the consumer is considered to have received the Closing Disclosure three business days after it is placed in the mail or delivered electronically. However, if the lender can provide evidence that a borrower received the disclosures sent by mail or electronically earlier than the three-business-day guideline, then the disclosures will be considered as received by the borrower on that date. Once the borrower receives the Closing Disclosure, loan consummation can take place three business days later. As you learned in the previous unit, there is no requirement to provide the seller with a copy of the Closing Disclosure prior to settlement. The loan generally cannot be consummated until both waiting periods have expired. These timelines are set by federal statute and are not negotiable. Even if the buyer and seller agree to an earlier close, loan consummation cannot take place until the statutory deadlines have passed. However, a borrower may be able to waive the waiting periods and expedite the closing if there is a bona fide personal financial emergency, such as to avoid foreclosure. This requires a dated written statement from the borrower with the details of the emergency.

Servicing Transfer Statement

If the originating lender or subsequent loan servicer sells the servicing rights to a borrower's loan to another loan servicer, a Servicing Transfer Statement must be sent to the borrower. The loan servicer must notify the borrower 15 days before the effective date of the loan transfer. This letter states that the transfer will not affect any terms or conditions of the loan documents except the terms directly related to the servicing of the loan. A servicing transfer statement should include the name and address of the new servicer, toll-free telephone number, contact information for the new servicing company, and the date and location to which the borrower should send the next payment. As long the borrower makes a timely payment to the previous servicer within 60 days of the servicing transfer, the borrower cannot be penalized. A bona fide transfer of ownership of a loan into the secondary market without a corresponding transfer of servicing rights is not covered under this provision of RESPA and, therefore, does not require a servicing transfer statement to the borrower.

BCD Page 2: Comparing Closing Costs

If you compare the details in the Loan Costs section on Page 2 of the Closing Disclosure against Page 2 of the Loan Estimate, you will see that the "A. Origination Charges" are the same. In the "B. Services Borrower Did Not Shop For" block, you can see that the $405 appraisal fee was placed in the "Paid by Others" column. It's also interesting to compare the "C. Services Borrower Did Shop For" block. The buyer in this example saved more than $500 from the estimate by shopping around. When totaling A + B + C, the buyer's "D. Total Loan Costs" is about $1,000 less than on the Loan Estimate. The Other Costs section does indicate some differences from the Loan Estimate, primarily due to the "F. Prepaids" block, where the actual homeowner's insurance premium is for 12 months, not two months as in the LE, and the property tax payment went from two months in the LE to six months. Another major difference in the Other Costs section can be found in the "H. Other" block, where the Closing Disclosure includes $1,400 in fees that were not on the Loan Estimate, accounting for a home inspection fee and homeowners association fees and a special assessment. As a result, the "J. Total Closing Costs" block indicates that that the buyer owes about $1,700 more than indicated on the Loan Estimate.

Consumer Financial Protection Bureau (CFPB)

In July 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). It is probably one of the most sweeping and far-reaching pieces of financial legislation enacted in American history. Title X of the Dodd-Frank Act, which is designated as the Consumer Financial Protection Act, created the Consumer Financial Protection Bureau (CFPB) as an independent entity within the Federal Reserve. The CFPB regulates the provisions and enforcement of federal consumer financial laws that ensure consumers have access to financial products in a market that is fair, transparent, and competitive. Effective July 2011, the rulemaking and enforcement authority over many consumer financial laws was transferred to the CFPB, including the Real Estate Settlement Procedures Act and the Truth in Lending Act (TILA). The CFPB has the authority to administer, enforce, and otherwise implement these and other federal consumer financial laws. Their authority includes the power to make rules and regulations, issue orders, and issue guidance. The rules implementing RESPA are known as Regulation X. The rules implementing TILA are known as Regulation Z.

RESPA Consumer Protections

In addition to the disclosure requirements of RESPA, the Real Estate Settlement Procedures Act includes many other provisions that are intended to protect consumers from possible settlement-related abuses, addressing: Settlement services Title insurance Kickbacks and referral fees Reserve accounts, also called escrow accounts or impound accounts Mortgage loan servicers We'll look at these provisions next.

BCD Page 3: Blocks K and M

In the "K. Due from Borrower at Closing" block, the borrower's debits are totaled. In the "M. Due to Seller at Closing" block, the seller's credits are totaled. Here we find the sale price of the property. If any personal property had been included in the sale, for example, carpets, draperies, appliances, lawnmowers, etc., those costs could be noted here. This is an example of a double-entry that we just talked about where the amount is a debit to the borrower and a corresponding credit to the seller. Similarly, any Adjustments for Items Paid by the Seller in Advance would be shown as a debit to the borrower and a credit to the seller.

TRID Disclosures

Introduction In the previous unit, you were introduced to the Real Estate Settlement Procedures Act (RESPA) and you learned about the TILA-RESPA Integrated Disclosures (TRID) rule that created the Loan Estimate and the Closing Disclosure forms that are essential elements of the settlement process. In this unit, we will look more closely at these two documents as we walk through each and discuss the information they contain. We'll look at the timing for the delivery of these disclosures and see how that can impact the settlement date. Finally, we'll discuss how these two disclosures correlate to each other. After completing this unit, you will be able to: Recall the purpose of the Loan Estimate and the Closing Disclosure. Identify the information contained in the Loan Estimate (LE) and the Closing Disclosure (CD). Recall provisions of the TRID rule related to the timing of the LE and the CD. Describe how the Loan Estimate and the Closing Disclosure correlate with each other.

Real Estate Settlement Procedures Act (RESPA)

Introduction In this unit, we will spend some time examining a federal law that touches all aspects of closing a real estate transaction, the Real Estate Settlement Procedures Act, more commonly referred to as RESPA. You may sometimes see RESPA referred to as Regulation X, which is the set of administrative rules that implement and enforce the law. As you'll see, RESPA was enacted to ensure that consumers receive the actual costs associated with closing a transaction and to protect consumers from predatory lending practices. It requires specific disclosures, imposes certain restrictions, and it prohibits many practices that have been found to harm consumers. After completing this unit, you will be able to: Recall the purpose and applicability of RESPA. Recognize the disclosure requirements of RESPA. Recall specific consumer protections provided by RESPA.

CFPB and Know Before You Owe

It should be no surprise that a primary directive of the Consumer Financial Protection Bureau is consumer education. To achieve this, the CFPB developed the Know Before You Owe mortgage initiative to empower consumers with the information that they need to make informed mortgage choices. The Know Before You Owe initiative includes: The implementation of the TILA-RESPA Integrated Disclosure (TRID) rule, which created the Loan Estimate (LE) and the Closing Disclosure (CD). The creation of the Your Home Loan Toolkit special information booklet. We will look at the TRID Rule in more detail in the next unit.

Charges Subject to Zero Tolerance

Lenders are not permitted to charge borrowers more than the amount disclosed on the Loan Estimate (other than for changed circumstances) for certain charges, called zero tolerance charges. These include: Fees paid to the lender, mortgage broker, or an affiliate of either for the origination, processing, or closing of a loan. These are charges that are retainedby that person or entity, not charges that are paid to one of these entities that are then passed on to an unaffiliated third party. This includes any interest rate that has been locked in. Fees paid to an unaffiliated third party if the lender did not permit the borrower to shop for a third-party service provider for a settlement service. As we mentioned earlier, services that a borrower cannot shop for include appraisal fees and credit report fees. Transfer tax, which is a tax on the value of real property that is imposed by the state or a local jurisdiction when the property is sold.

Revised Closing Disclosure: Example

Let's look at an example of a change to the Closing Disclosure that triggers a new three-business day waiting period. Let's say the lender takes a loan application on Tuesday, May 1 and mails the Loan Estimate to the borrower on Wednesday, May 2. The lender then mails the Closing Disclosure to the borrower on Wednesday, May 9. The buyer and seller agree to close the transaction on Friday, May 18. On Monday, May 14, the borrower's interest rate lock expires, and the interest rate increases by 3/8%. This causes the annual percentage rate to increase above the 1/8% tolerance, and the lender is required to issue an updated Closing Disclosure. The lender mails the corrected CD to the borrower the next day. The Closing Disclosure is considered to be "delivered" to the borrower three business days later, which is Friday, May 18, the original close date. Now, the earliest that settlement can take place is Tuesday, May 22. If the lender can verify that the borrower received the corrected Closing Disclosure on the day it was issued, however, the closing could still take place on the original date, Friday, May 18. While a real estate broker has no control over the issuance of these required disclosures, you can see how important it is to stay on top of these critical dates and be prepared to coordinate as necessary to keep the transaction moving toward a successful conclusion.

Timing of the TRID Disclosures: Example

Let's look at an example. The lender takes an application for a fixed-rate loan on Tuesday, May 1, and mails the Loan Estimate the next day, Wednesday, May 2. Considering only the requirements related to the Loan Estimate, theoretically, the earliest the loan could close is the following Thursday, May 10, the seventh business day after mailing the initial disclosure. But it's necessary to consider the Closing Disclosure deadlines. Let's say the lender emailed the Closing Disclosure to the borrower on Saturday, May 5. The Closing Disclosure is not considered to be "received" by the borrower for three business days, which is Wednesday, May 9. The earliest that loan consummation can take place is three business days later, or Saturday, May 12.

Changes Before Loan Consummation

Most changes to the Closing Disclosure will NOT require a new three-business day waiting period; however, a new waiting period WILL be required for the following types of changes: There are changes to the loan's annual percentage rate (APR) outside accepted tolerances. There are changes to the loan product, for example, a fixed-rate loan is changed to an adjustable rate loan. A prepayment penalty is added. Remember, if there is a change in the annual percentage rate that falls within accepted tolerances, the APR will be deemed to be accurate. APR changes outside accepted tolerances that would trigger the additional waiting period would be an increase of more than 1/8% for a regular transaction (generally, a fixed-rate loan) or an increase of more than 1/4% for an irregular transaction (generally, an adjustable-rate loan).

TRID Exceptions

Most mortgage transactions are covered by the TRID rule, although the TRID rule and these disclosures do not apply to the following: Reverse mortgages Home equity lines of credit Chattel mortgages (mobile home and unattached premises) Loans made for fractional interests in property, such as time shares Loans made to a non-natural person, e.g., business entities Nonetheless, a lender could choose to use the Loan Estimate and the Closing Disclosure for such transactions for the sake of convenience and consistency.

BCD Page 3: Blocks L and N

On the borrower's side in the "L. Paid Already by or on Behalf of Borrower at Closing" block, we see an accounting of the borrower's credits. For example, any earnest money deposit or due diligence fee the borrower made is a credit, as is the loan amount, since it's the lender who brings that amount to closing. On the seller's side, the "N. Due from Seller at Closing" block indicates all of the seller's debits. This includes the seller's closing costs, as well as the amount of any outstanding mortgage(s) that must be paid from the proceeds of the sale. Credits from the seller to the buyer are shown in blocks L. and M. as well, such as the $2,500 seller credit we've already discussed for this sample. These blocks also indicate any Adjustments for Items Unpaid by the Seller, for example, real estate taxes, which are paid in arrears.

Loan Estimate: Page 1

Page 1 of the Loan Estimate includes: General information, such as the name of the applicants, the property address, and the sale price of the property. The purpose of the loan, for example, purchase, refinance, construction. A description of the loan, including the product (e.g., fixed rate or adjustable rate) and the loan type (e.g., conventional, FHA-insured, or VA-guaranteed). Any rate lock the lender has made available, including the date and time the rate lock ends. A Loan Terms table that discloses the loan amount, the initial interest rate, the monthly principal and interest, any prepayment penalty or balloon payment. A Projected Payments table calculating the entire monthly payment necessary to meet the PITI obligation of principal, interest, mortgage insurance, and any required escrow payment for property taxes and homeowner's insurance. A Costs at Closing table indicating the estimated closing costs (details on Page 2) and the estimated amount of cash needed to close the loan (details on Page 2). Borrowers should be comfortable with the risks they take on when borrowing for a home purchase or refinance. Notice that the Loan Terms section indicates if there are certain types of risky loan features, such as a balloon payment or a prepayment penalty (note that prepayment penalties are uncommon and generally prohibited in North Carolina). The estimate of the charges and terms for all settlement services must be available for at least 10 business days from when the Loan Estimate is provided. However, this 10-business day provision does not apply to the interest rate and the charges and terms that are dependent upon the interest rate, such as adjusted origination charges and per diem interest. Because of this, borrowers and lenders frequently agree to a rate lock for a pre-determined period. If a borrower does not express intent to continue with an application within 10 business days after the Loan Estimate is provided, the loan originator is no longer bound by the terms.

BCD Page 2: Closing Cost Details

Page 2 of the Closing Disclosure itemizes the closing costs paid by the borrower, the seller, or by others. For example, in your sample Closing Disclosure, we can see the fees required by the lender to make the loan, such as origination charges and escrow payments, as well as other costs necessary to conclude the transaction, such as government taxes. The columns for Borrower-Paid items and Seller-Paid items are divided into two parts: Items paid at closing. These items figure into the total costs owed by the buyer and seller on the day of closing. Items paid before closing. These items are noted here for both buyer and seller. Items the buyer paid before closing reduce the buyer's cash to close calculation on Page 3. Items paid before closing are not included in the summaries of transactions for either buyer or seller, however. You will sometimes see these charges as being O.C., or paid outsides of closing. There's also a column for items that are Paid by Others. Page 2 would be included in the Seller Closing Disclosure. It is here that any commission due is itemized. Generally, this is paid by the seller, but sometimes a buyer is responsible for compensating a real estate broker.

Loan Estimate: Page 2

Page 2 of the Loan Estimate provides a good faith itemization of the costs of obtaining the loan. The items associated with the mortgage are broken down into two general types: Loan Costs are those costs paid by the borrower to the lender and third-party providers of services the lender requires to be obtained by the borrower during the origination of the loan. These costs are categorized as origination charges, services the borrower cannot shop for such as an appraisal fee or credit report fee, and services the borrower can shop for, such as fees for pest inspections and title insurance. Other Costs include taxes, governmental recording fees, and certain other payments involved in the real estate closing process, for example, initial escrow payments and prepaid fees such as homeowner's insurance, mortgage insurance, property taxes, and title insurance. The Calculating Cash to Close table then shows how the amount of cash needed at closing is calculated, taking the down payment, deposit (which may include due diligence fees), and other credits into consideration.

BCD Page 4: Additional Information About This Loan

Page 4 of the Closing Disclosure is a buyer's only page that describes characteristics of the loan: Information about the future assumption of the loan by a subsequent purchaser Whether the loan contains a demand feature such as an acceleration clause or due on sale clause that can require early repayment of the loan Any obligation for the borrower to pay a late fee Whether there could be negative amortization Whether the lender will allow partial payments A statement indicating that the borrower is granting a security interest in the property Details about any escrow account held by the lender or loan servicer Additional information would be found on this page for other types of loans. For example, if it's an adjustable rate mortgage, a table showing details about the index, margin, change frequency, and payment caps would be included.

BCD Page 5 Sections

Page 5, another buyer's only page, includes four sections: Loan Calculations. Details about the payments made by the borrower, such as the total number of payments, finance charges, and the annual percentage rate. Other Disclosures. Miscellaneous disclosures to the borrower about their ongoing rights and responsibilities. Contact Information. Includes lender, mortgage broker, real estate broker(s), and settlement agent as applicable. Confirm Receipt. The signature(s) of the borrower(s). The borrower should compare the information here to Page 3 of the Loan Estimate to ensure that the annual percentage rate and other loan terms are the same.

Legitimate Discounts or Rebates

RESPA allows legitimate discounts on services to consumers if a combination or package of settlement services is offered at a total price lower than the sum of the individual settlement services, as long as: The services are not considered a "required use." The discount is a true discount below prices that are otherwise generally available. The use of any such combination is optional to the purchaser. The lower price for the combination is not made up by higher costs elsewhere in the settlement process.

Fee-Splitting and Unearned Fees

RESPA also prohibits fee-splitting and receiving unearned fees or a percentage of any charge made or received for services not actually performed. The following payments, however, are allowed: Payment of fees to attorneys, title companies, or agents for services actually performed Payment of a bona fide salary or compensation to a person for goods or products actually furnished or services actually performed in the making of a loan Payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers An employer's payment to its own employees for any referral activities

Applicability of RESPA

RESPA applies to any federally-related mortgage loan (including refinancing) made by an institutional lender and secured by a first or subordinate lien on a residential real property on which is constructed or will be constructed a one-to four-family dwelling (including condos, co-ops, and manufactured homes). The rules and regulations of RESPA apply to the following: Conventional loans FHA-insured, VA-guaranteed, and other government-sponsored loans Purchase loans Loan assumptions (if they require lender approval) Loan refinancing transactions Property improvement loans Reverse mortgages Home equity lines of credit Reverse mortgages and home equity lines of credit are subject to the provisions of the Real Estate Settlement Procedures Act but are NOT subject to the disclosure requirements of the TILA-RESPA Integrated Disclosure Rule.

Annual Escrow Statement

RESPA requirements continue even after the loan closes. The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage via the Annual Escrow Statement. This statement summarizes all escrow account deposits and payments during the servicer's 12-month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken. Any excess of $50 or more in the escrow account must be returned to the borrower, assuming the borrower is not delinquent with payments. In that case, the lender is not required to return any excess escrow.

RESPA: Penalties for Violations

RESPA subjects violators to the following criminal and civil penalties: Fines up to $10,000 Imprisonment up to one year Liability up to three times the amount of the charge paid for the service (civil lawsuit) Now let's review.

Reserve Accounts

Section 10 of RESPA sets limits on the amounts a lender may require a borrower to put into a reserve account, also called an escrow account or impound account. An escrow account holds money, generally for purposes of paying property taxes, homeowners hazard insurance, and other charges related to the property, that some mortgage lenders collect every month along with a mortgage payment. RESPA does not require lenders to impose an escrow account on all borrowers; however, certain loan programs may require escrow accounts as a condition of the loan to better protect lenders and insurers. For example: A mortgage loan that includes mortgage insurance generally requires an escrow account. All government-insured or guaranteed loans require an escrow account. A loan that meets the Truth in Lending Act definition of a "higher-priced" loan is required to have a lender-imposed escrow account for at least 60 months. Lenders are required to collect monthly escrow payments for certain other mortgage loans for at least the first five years of the mortgage.

Mortgage Servicing Disclosure Statement

Section 6 of RESPA addresses the ongoing servicing of a mortgage loan, which is defined as the continued maintenance of a mortgage loan, including accepting escrow payments and paying these charges when due. The Mortgage Servicing Disclosure Statement that must be given to a borrower within three business days of a completed loan application provides information to the borrower regarding whether the lender intends to service the loan, sell, or transfer the servicing to another lender. If the lender will engage in the servicing of the mortgage loan for which the applicant has applied, the disclosure may consist of a statement that the entity will service the loan and does not intend to sell, transfer, or assign the servicing of the loan. If the lender will not engage in the servicing of the mortgage loan for which the applicant has applied, the disclosure may consist of a statement that such entity intends to assign, sell, or transfer servicing of such mortgage loan before the first payment is due. In all other instances, the disclosure must state that the servicing of the loan may be assigned, sold, or transferred while the loan is outstanding.

Illegal Kickbacks and Referral Fees

Section 8 of RESPA prohibits giving or accepting a fee, kickback, or anything of value in exchange for referrals of settlement service business. A referral is any oral or written action directed to a person that has the effect of affirmatively influencing the selection of a provider of a settlement service or business. RESPA defines a "thing of value" very broadly, and it can include any of the following: Money, things, discounts, trips, and payment of another person's expenses Salaries, commissions, earnings, fees, or distribution of partnership profits or franchise royalties Credits representing money paid at a future date or the opportunity to participate in a money-making program Special bank deposits or accounts, special or unusual banking terms Services, sales, or leases of all types at special or free rates Lease or rental payments based in whole or in part on the amount of business referred Reduction in credit against an existing obligation A thing of value does not include things of minimal value used for promotional purposes, such as pens, mementos, coffee cups, hats, etc.

Title Insurance

Section 9 of the Real Estate Settlement Procedures Act prohibits a seller or other party to the transaction from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of the sale unless the seller pays for the title insurance and all other title-related fees. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

BCD Page 3: Calculation

The Borrower's Transaction debits and credits and the Seller's Transaction debits and credits are reconciled, with the final calculations indicated at the bottom of Page 3. Notice that whoever prepares the Closing Disclosure must select a box indicating whether cash is going from or to the borrower, and from or to the seller. There are certainly instances where a seller has to bring cash to the closing table, for example, if the seller has outstanding mortgage debts that cannot be repaid from the proceeds of the sale after all closing costs are paid. Remember, a Seller Closing Disclosure (SCD) would be an abbreviated version of a Buyer Closing Disclosure, showing only the seller's associated fees, charges, and transaction details.

BCD Page 3: Calculating Cash to Close

The Calculating Cash to Close section of Page 3 has columns to compare items from the Loan Estimate to the Final amount to arrive at Cash to Close, which is the amount the borrower must bring to closing: Total Closing Costs Closing Costs Paid Before Closing Closing Costs Financed (Paid from your Loan Amount) Down Payment/Funds from Borrower Deposit Funds for Borrower Seller Credits (or due diligence fee paid to seller) Adjustments and Other Credits One thing to notice in our sample Closing Disclosure is that the borrower paid a $2,500 due diligence fee to the seller (noted in the "L. Paid Already by or on Behalf of Borrower at Closing" block further down the page). Remember, this is a nonrefundable fee a buyer may choose to pay a seller to ensure the seller does not accept any other offer during the buyer's due diligence period. This amount was not included on the Loan Estimate. These items also require an answer to the question Did this change? Lenders may be required to pay a credit if changes between the original Loan Estimate and the final numbers exceed allowable tolerances.

BCD Page 1: Costs at Closing

The Costs at Closing table (also found on the Loan Estimate) indicates the Closing Costs and the Cash to Close, which is the amount the borrower must bring to closing. If you compare the final numbers on the Closing Disclosure to the projected costs at closing from the sample Loan Estimate, you'll see that while the closing costs are about $1,700 greater than estimated, the cash to close is just over $1,900 less than estimated, which should make the buyer happy. We can compare specific costs and charges on pages 2 and 3 to determine where the differences are.

Purpose of the Loan Estimate

The Loan Estimate (LE) is designed to provide an accurate, good faith estimate of all closing costs charges the borrower can expect to incur throughout the loan origination process and at loan consummation. The Loan Estimate must include the critical data a borrower needs to shop for settlement services and determine the best loan, for example: The date through which the specific interest rate for the loan is available A concise summary of terms of the loan Whether the interest rate can rise under certain circumstances Whether the lender requires an escrow account for taxes or other charges such as hazard insurance The total estimated settlement charges, which is generally the amount of money necessary to bring to settlement in addition to funds for the down payment Borrowers are urged to review the Loan Estimate carefully to ensure that it reflects the terms of the loan as discussed with the lender. If a borrower is working with multiple lenders, having a Loan Estimate from each lender allows him to compare the bottom line of the offered loans and choose the best option for him.

Loan Estimate Timing

The Loan Estimate must be given to a borrower within three business days of the receipt of the borrower's completed loan application. Lenders must allow applicants to have a seven-business day waiting period after mailing or delivering the Loan Estimate before closing the loan. Borrowers may modify or waive the seven-day waiting period if they can show that it is a bona fide personal financial emergency. For purchase transactions that have a "time is of the essence" clause, the closing date may need to be amended to accommodate the full waiver requirements. We'll look at the Loan Estimate, including its timing considerations, in more detail in the next unit. The only fee the lender can collect from an applicant before issuing a Loan Estimate is a fee for the credit report.

BCD Page 1: Projected Payments

The Projected Payments table (also found on the Loan Estimate) provides a complete picture of the borrower's total monthly obligations, including principal & interest, mortgage insurance, and estimated escrow, which for this transaction includes property taxes and homeowner's insurance. The borrower is also responsible for monthly homeowner's association dues. Note that the mortgage insurance is projected to drop off after year 7 of the loan, which reduces the monthly payment by $82. Also, notice the comment that the estimated taxes, insurance, and assessments "can increase over time." This refers to the fact that property taxes, insurance policy premiums, and HOA dues are charges that typically increase over the term of the average mortgage loan.

Purpose of RESPA

The Real Estate Settlement Procedures Act was enacted by the U.S. Congress in 1974 to protect consumers from predatory lending practices and to ensure that consumers receive the actual costs associated with closing a transaction in a timely manner. The purpose of RESPA is to: Help consumers get fair settlement services by requiring that key service costs be disclosed in advance. Protect consumers by eliminating kickbacks and referral fees that will unnecessarily increase the costs of settlement services. Further protect consumers by prohibiting certain practices that increase the cost of settlement services.

Unit Summary

The TILA-RESPA Integrated Disclosure (TRID) rule created the Loan Estimate (LE) and the Closing Disclosure (CD) disclosure documents. Most mortgage transactions are covered by the TRID rule. The Loan Estimate (LE) provides an accurate, good faith estimate of all closing costs charges, allowing a borrower to shop for settlement servicesand determine the best loan. A primary disclosure is the annual percentage rate (APR), which expresses the full cost of obtaining the loan as a rate. Lenders must provide the LE to borrowers within three business days of a completed loan application. The estimate of the charges and terms for all settlement services, but not the interest rate, must be available for at least 10 business days from when the LE is provided. Once the Loan Estimate has been issued, there must be a valid "changed circumstance" or a borrower-requested change to the loan terms to trigger the need to issue a revised LE. The APR is generally considered accurate if it does not vary above or below that initially disclosed on the LE by more than 1/8% for a regular transaction or 1/4% for an irregular transaction. When necessary, a revised LE must be provided within three business days of receiving information sufficient to make that determination. Whether a Loan Estimate was made in good faith is determined by calculating the difference between the estimated charges originally provided in the LE and the actual charges paid by or imposed on the borrower at loan closing as shown on the Borrower Closing Disclosure (BCD). The charges and fees for settlement services listed on the Loan Estimate are subject to tolerance limits for the actual costs included on the CD, including charges subject to zero tolerance (fees paid to the lender, transfer tax, and fees the borrower cannot shop for), charges subject to a 10% cumulative tolerance (generally, fees the borrower can shop for based on a list from the lender), and charges that may exceed the disclosed amount (generally, amounts placed in escrow (property insurance and property tax), prepaid interest, fees the borrower can shop for or for services not required by the lender). The Closing Disclosure itemizes the actual closing costs associated with getting a loan and purchasing real property. The CD itemizes the closing costs paid by the borrower, the seller, or by others. The lender may prepare separate CDs for the buyer/borrower and the seller. The purpose is to disclose the buyer's needed cash to close or the seller's cash received at closing. A borrower must receive the Closing Disclosure at least three business days prior to loan consummation. If the BCD is hand-delivered, it is considered to be received the day it is provided. If it is mailed or delivered electronically, it is considered received three business days after it is placed in the mail or delivered electronically. The earliest a loan may close is the seventh business day after the initial Loan Estimate is provided to the borrower. The loan generally cannot be consummated until both waiting periods have expired with some exceptions for bona fide personal financial emergencies. If the terms on the Closing Disclosure are determined to be inaccurate, the lender will be required to issue a corrected CD to the borrower. Most changes do not require a new waiting period, but a new three-business day waiting period is required if the APR increases outside the tolerances, the loan product changes, or a prepayment penalty is added. Following loan consummation, if it appears that the borrower overpaid for any settlement charges listed in the Loan Estimate, the lender must refund the excess monies to the borrower and deliver or mail a corrected Closing Disclosure within 60 days.

Unit Summary

The federal Real Estate Settlement Procedures Act, more commonly referred to as RESPA, was enacted to ensure that consumers receive the actual costs associated with closing a transaction and to protect consumers from predatory lending practices. RESPA applies to any federally-related mortgage loan (including refinancing) secured by a first or subordinate lien on a residential real property that is constructed or will be constructed to a one- to four-family dwelling. The Consumer Financial Protection Bureau (CFPB) is an independent entity within the Federal Reserve that regulates the provisions and enforcement of RESPA under the administrative rules known as Regulation X. The CFPB developed the Know Before You Owe mortgage initiative to educate and protect consumers by implementing the TILA-RESPA Integrated Disclosure Rule (TRID)—which mandates the use of the Loan Estimate (LE) and the Closing Disclosure (CD)—and the Your Home Loan Toolkit special information booklet. Within three business days of a completed loan application, a lender must provide the borrower with the special information booklet and the Loan Estimate, which provides a good-faith estimate of credit costs and transaction terms, including any yield spread premium (YSP). Yield spread premiums are disclosed on the Loan Estimate as a credit to the borrower. A completed loan application must include the following six pieces of information: The consumer's name; 2. The consumer's income; 3. The consumer's Social Security number to obtain a credit report (or another unique identifier if the consumer has no Social Security number); 4. The property address; 5. An estimate of the value of the property; 6. The mortgage loan amount sought. For all loans that proceed to closing and that are subject to the provisions of the TRID Rule, lenders must deliver a Closing Disclosure (CD) to the borrower at least three business days prior to loan consummation. The CD discloses details about the actual loan terms and settlement service provider charges. Lenders may share the responsibility for the completion and accuracy of a Closing Disclosure with a settlement agent. RESPA prohibits a "required use" of specific settlement service providers (with some exceptions for lenders). RESPA also prohibits giving or accepting a fee, kickback, or anything of value in exchange for referrals of settlement service business. RESPA also prohibits fee-splitting and receiving unearned fees or a percentage of any charge made or received for services not actually performed. Under some circumstances, RESPA does allow legitimate discounts on services to consumers if a combination or package of settlement services is offered at a total price lower than the sum of the individual settlement services. With proper disclosure, RESPA does allow affiliated business arrangements (AfBAs) involving real estate settlement services, where someone in a position to refer settlement services has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1% in a provider of settlement services. The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. RESPA limits the amount a lender may require a borrower to put into a reserve account, also called an escrow account or impound account, to no more than 1/12th of the total of all disbursements payable during the year (one month). After the loan closes, servicers must provide borrowers with an Annual Escrow Statement for as long as the impound account is required. RESPA requires lenders to provide borrowers with a Mortgage Servicing Disclosure Statement indicating whether the lender intends to service the loan, sell, or transfer servicing to another lender. If the originating lender or subsequent loan servicer sells the servicing rights of a loan, a Servicing Transfer Statement must be sent to the borrower 15 days before the effective date of the loan transfer.

Unregulated Services

The following service providers are not regulated by RESPA or subject to RESPA rules provided they are not active in the mortgage loan origination process before settlement. These would be considered post-settlement service providers: Building/remodeling contractors Service and repair contractors Moving companies Landscaping companies Home improvement or design companies

Transactions Not Covered by RESPA

The following types of transactions are NOT covered under the provisions of RESPA: All-cash sale transactions Sales where the individual home seller takes back the mortgage Loans for commercial, business, or agricultural purposes Assumptions not requiring lender approval Loan conversions Temporary construction loans, as long as permanent financing of a one- to four-family residential property is not anticipated Bridge loans Loans to purchase vacant or unimproved property unless a dwelling will be constructed or moved onto the property within two years Bona fide transfers of a loan obligation in the secondary market

Loan Estimate: Page 3

The last page of the Loan Estimate provides additional information about the loan. The Comparisons table is intended to help a borrower easily compare loan terms offered by other various lenders. The primary disclosure is the critical annual percentage rate (APR), required by the Truth in Lending Act. The APR, which expresses the full cost of obtaining the loan as a rate, is a combination of the interest rate, loan fees, discount points, and all other charges for obtaining the loan calculated on an annual basis. The APR is sometimes called the effective rate of interest versus the nominal rate of interest. The nominal rate of interest is the interest rate negotiated between the lender and the borrower that appears in the promissory note. Considering the nominal interest rate alone may be misleading or confusing to the borrower. For example, Lender A may charge 5% interest, while Lender B charges 4.75% interest. However, there may be other total finance charges to consider. Lender A may charge 1 point as a loan origination fee, while Lender B charges 1 1/2 points. Or one may offer the borrower the option of paying discount points or yield spread premium, while the other does not offer such options. The Comparisons table also shows the borrower how much he or she will have paid in principal and interest and other loan-related obligations at the end of five years, as well as the Total Interest Payment (TIP) paid over the life of the loan as a percentage of the loan amount. Both of these numbers can be quite a shock to a borrower. The Other Considerations section provides some information for the borrower, such as whether the lender will allow the assumption of the loan, whether the lender intends to transfer loan servicing, or the conditions related to handling a late payment. A borrower is NOT required to sign the Loan Disclosure, although the lender may ask for a signature as proof of receipt. Signing the Loan Disclosure does not obligate the borrower to continue with the loan process.

Timing of Required Disclosures

The table below indicates the borrower disclosures required to comply with the Real Estate Settlement Procedures Act. We'll look at these briefly on the following pages. We'll discuss the Loan Estimate and the Closing Disclosure in greater detail in the following unit. WhenWhich DisclosureAt or Within 3 Business Days of a Completed ApplicationSpecial Information Booklet/Your Home Loan ToolkitLoan Estimate (LE)Mortgage Servicing Disclosure StatementAffiliated Business Arrangement (AfBA) Disclosure (if affiliated services are required by the lender)Before SettlementAffiliated Business Arrangement (AfBA) Disclosure (at or before the time of referral)Closing Disclosure (CD): At least 3 days prior to consummationAt SettlementFinalized Closing Disclosure (CD)Initial Escrow Statement (within 45 days of closing)After SettlementAnnual Escrow StatementServicing Transfer Statement If the applicant withdraws the application or the lender turns down the loan before the end of the three-business-day period, RESPA does not require the mortgage loan originator to provide these disclosures.

Permissible Tolerance Limits Between LE and CD

The tolerance limits between estimated and actual charges are broken down into three categories: Charges subject to zero tolerance Charges subject to a 10% cumulative tolerance Charges that may exceed the disclosed amount If any charges at settlement exceed the charges listed on the Loan Estimate by more than the permitted tolerances, the only way the loan originator can cure the tolerance violation is by reimbursing the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement. Let's see what charges are included in these tolerance categories.

BCD Page 1: Transaction Details and Loan Terms

The top of Page 1 of the Closing Disclosure provides details about the loan transaction: Closing information, such as the relevant dates, property address and sale price of the property Transaction information, including the names and addresses of the borrower and seller Loan information, including the term, purpose, product, loan type, and loan ID The Loan Terms table shows the: Loan amount, and an indication of whether the amount can increase after closing Interest rate, and an indication of whether the amount can increase after closing Monthly principal and interest payment, and an indication of whether the amount can increase after closing Loan features, including details about any prepayment penalty or balloon payment This information should match the details about the loan and its terms found on Page 1 of the Loan Estimate.

BCD Page 3: Summaries of Transactions

These tables itemize the amounts associated with the real estate purchase transaction between the buyer and seller, together with closing costs, to disclose the amounts due from the borrower or due to the seller at closing as applicable. The borrower's transaction details are on the left side of the page; the seller's transaction details are on the right side of the page in this example. On this page, you can also see how debits (what someone owes) and credits (what someone receives) can be entered either as a single-entry or a double-entry. A single-entry item affects only one party and so appears only that one side. A double-entry item affects both parties; however, a double-entry item is always a charge or debit to one party and a credit or benefit to the other party. We will discuss single- and double-entry debits and credits in more detail in Part 3 of this chapter.

TILA-RESPA Integrated Disclosure (TRID) Rule

To quickly review, due to certain changes implemented following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) the disclosure forms were changed for most closed-end credit transactions secured by real property. The TILA-RESPA Integrated Disclosure (TRID) rule consolidated four existing disclosures into two: The Good Faith Estimate (GFE) and Initial Truth in Lending Disclosure were consolidated into the Loan Estimate (LE). The HUD-1 Settlement Statement and the Final Truth in Lending Disclosure were consolidated into the Closing Disclosure (CD). Loan originators are prohibited from charging the borrower a fee for the preparation and delivery of the Loan Estimate or the Closing Disclosure.

Changes After Loan Consummation

When a Closing Disclosure is discovered to have an inaccuracy, whether numerical or clerical, or an event in connection with the settlement occurs within 30 calendar days AFTER loan consummation that causes an amount paid by the borrower or seller to be inaccurately indicated on the Closing Disclosure, the lender must give or mail a corrected Closing Disclosure to the parties to the transaction within 30 days of discovering the inaccuracy. Following loan consummation, if it appears that the borrower overpaid for any settlement charges listed in the Loan Estimate, thelender must refund the excess monies to the borrower and deliver or mail a corrected Closing Disclosure reflecting the refund within 60 days.

AfBA Disclosure

Whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest, that relationship must be disclosed. The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the referred provider's charges. The following message should also be conveyed: "There are frequently other settlement service providers available with similar services. You are free to shop around to determine that you are receiving the best services and the best rate for these services." Except in cases where a lender refers a borrower to an attorney, credit reporting agency, or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.

AfBA Compensation

While it is perfectly legal to refer people to someone with an affiliated business relationship, RESPA requires specific guidelines to be followed. This keeps consumers informed of their choices and protects them from being coerced into working with a company they didn't choose. How someone with ownership interest receives compensation for settlement services is important under RESPA. Legitimate fees or wages for services actually rendered or hours worked are permissible. Additionally, it is permissible to accept bona fide compensation from the ownership interest or franchise relationship between entities in an affiliate relationship, as long as it is for ordinary business purposes and is not a fee for the referral of settlement service business or an unearned fee.

Affiliated Business Arrangements (AfBAs)

While kickbacks from referrals are prohibited, RESPA does recognize the legitimacy of affiliated business arrangements involving real estate settlement services. An affiliated business arrangement, or AfBA, is a situation where a person who is in a position to refer settlement services has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1% in a provider of settlement services. Under RESPA, it is acceptable for this person, or an associate of this person, to refer business to that provider or in some way influence the selection of that provider. Within the scope of this definition, a "person" could be an individual or a corporation, association, partnership, or trust. The term "associate" refers to someone who has one or more of the following relationships with a person in a position to refer settlement business: A spouse, parent, or child of that person A corporation or business entity that controls, is controlled by, or is under common control with such person An employer, officer, director, partner, franchisor, or franchisee of that person Anyone who has an agreement, arrangement, or understanding with that person when the purpose or substantial effect of which is to enable that person to benefit financially from the referrals