Mortgage Loan Origination Activities

Insurance: Hazard, Flood, Mortgage

Hazard, flood, mortgage and title insurance are the four most common types of insurance. The beneficiary depends on the purpose of the insurance. Mortgage Insurance: There is Private Mortgage Insurance and FHA's mortgage insurance premium policy. *PMI is generally required on conventional loans when the LTV is greater than 80%. This provides some security to the lender in the event of a default with the theory being that higher LTV poses a greater risk of default. This also allows borrowers to get into homes with a lower down payment. The Homeowners Protection Act (HPA) allows homeowners to request discontinuation of PMI when they reach 20% equity in the home and requires auto discontinuation when the loan has reached 78% LTV. When the borrower requests discontinuation at 80% LTV, it is at the lender's discretion to the grant the request by considering the payment history. That includes no payments that were more than 30 days late in the past 12 months immediately proceeding the request, and no payments more than 60 days late in the period beginning 24 months immediately proceeding the request. MIP is required on all FHA loans and is intended to sserve the same purpose. Upfront MIP is collected on all FHA loans in addition to annual MIP which is collected on a monthly basis. January 2013 HUD issued Mortgagee Letter 2013-4 creating stricter requirement for MIP. Under the new standards for FHA case numbers to be assigned on or after June 3, 2013, the folowing rules for MIP apply: -Mortgages involving an original principal obligation less than or equal to 90% LTV will be subject to an annual MIP that "will be assess until the end of the mortgage term or for the first 11 years of the term, whichever occurs first. -Mortgages involving an original principal obligation with an LTV greater than 90% will be subject to annual MIP "until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. There are a few exceptions to this rule; including one for home equity conversion mortgages. Hazard Insurance: This is required to protect the security of the collateral property from damage cause by fire or other risks. It is commonly known as homeowners insurance. A loss payee clause, or lien holder clause, is inlcuded in these policies in order to protect the lender. It requires claims to be made jointly payable to the lender and the homeowner in order for the lender can ensure its collateral is repaired or its debt is retired in the event of damage to the property. In some cases this may be force-placed, when the servicing entity obtains coverage after the borrower's failure to obtain and maintain insurnce. Servicers are not permitted to charge a borrower for force-placed insurance without reasonable basis for believing the borrower has failed to obtain coverage. If the borrower can show they have provided their own coverage can have the force-placed policy removed and may have any premiums charged to them revered. Flood Insurance: Used to protect the security of the collateral property, its use id determined by the geographic location of the real estate. The laws imposing this are found under the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973. Under these regulations, banks that are members of the Federal Reserve System may not extend mortgage credit that will be secured by a dwelling in a flood zone unless the loan is covered by flood insurance for the entire term. It can be obtained through the Federal Emergency Management Agency's National Flood Insurance Plan. This program aims to decrease the socio-economic impact of flooding by promoting the purchase and maintenance of "risk insurance"; particularly flood insurance. FEMA helps to achieve this goal by offering affordable insurance. The most recent changes to the cost of flood insurance took place in 2014 with the enactment of the Homeowner Flood Insurance Affordability Act. The appraiser has a responsibility to determine the flood zone designation for the property's location. The originator, processor and underwriter must ensure that if the property is located in zone designed with an "A" or "V" prefix, poper flood insurance is in place. FEMA has undertaken a massive effort of flood hazzard identification and mapping to produce the Flood Boundary and Floodway Maps (FBFMs). One of these areas is a Special Flood Hazard Area (SFHA), defined as an area of land that would be inundated by a flood having a 1% chance of occurring in any given year. This is also referred to as the base or 100-year flood. All with an A or V prefix fall into this area. Flood insurance is reqired for insurable structures within SFHA to protect federal financial investments and assistance used for acquisition and/or construction purposes within communities participating in FEMAs National Flood Insurance Program (NFIP). Mandatory Flood Insurance: Zones with a prefix of A and V are considered SFHAs and require mandatory flood insurance under the deferally regulated loan programs. Other flood zones may or may not require insurance due to special circumstances. Zone V and VE correspond to area within the 1% annual chance coastal floodplains that have additional hazards associated with storm waves. Zone D designation is used for areas where there are possible but undermined flood hazards. In these areas, no analysis of flood hazards has been conducted, but while mandatory flood insurance requirement do not apply, coverage is available. Zones B, C, and X correcpond to areas outside the 1% annual chance floodplain; areas of 1% annual chance sheet flow flooding where average depths are less than one foot; areas of 1% annual chance stream flooding where the contributing drainage area is less than one square mile; or areas protected from the 1% annual chance flood by levees. Insurance purchase is not required in these zones.

Application Information and Requirements

Loan applicants must complete a Uniform Residential Loan Application (URLA) also know as Form 1003 which is the standard form when applying for a mortgage. Application Interview: Purpose is to obtain information to complete the loan application keeping in mind the Ability to Repay Rule (ATR Rule) and the Qualified Mortgage Rule (QM Rule) which were mandated by Dodd-Frank Act. * Advise the borrower(s) about the gravity of failing to provide truthful informtation which is emphasized on the last page of the application where the borrow but read and sign. The loan originator is also required to sign and by signing, indicates responsibility for their actions in completing the applicaiton. Lenders should explain that under Title 18, it is a crime to knowingly and willfully make any verbal or written statement to the government that is materially fase, fictitious or fraudulent. A violation of Title 18, Section 1001 may lead to a 5 year jail term. Some lenders may also provide borrowers with the FBI Mortgage Fraud Warning Notice. It is not mandatory and is completely voluntary. Section I: Type of Mortgage and Terms of Loan: This is where the borrowers choose the type of loan for which they are applying as well as the loan amount. The agency case number box is designated for the FHA or VA case numbers. After discussion about borrowers goals the term and amortization type should be completed. Section II: Property Information and Purpose of Loan: This is where you will provide information concerning the property address and how the loan proceeds will be used as well as designation of a single family home or multi unit. The legal description may not be available immediately as it is necessary to obtain it from the county recorder's office or through a title insurance company. This is where they indicate if this is a purchase or a refi and if the house with be primary, secondary or investment property. -Construction or construction permanent loan: if the applicant is wanting a construction loan they must state the year the lot was acquired, the original cost, any existing liens on the property, the present value plus the cost of improvements. Discussion of the risks and benefits should occur around balloon payments, one closing or two, etc. -Refinance: If a refinance they must state the year of acquiring the property, original cost, amount of any liens, the purpose of the refinance and the cost of improvement made or to to be made. This section also requests the borrower(s) legal name and "manner in which the title will be held". This section also asks if the estate will be held in "Fee Simple" or "Leashold". It is not likely that originators will encounter a transaction with a leasehold. Black's Law Dictionary defines this as "An estate in realty held under a lease; an estate for a fixed term or years." This ownership is not permanent and there may be limitation related to the use and disposition of the property. "Fee Simple" is "One in which the owner is entitled to the entire property with unconditional power of disposition during his life and descending to his heirs... upon his death. This is the desired form to holding property. *Source of down payment, Settlement Charges and/or Subordinate Financing. -Source of funds could be "Checking/Savings" or "Gift Funds". -Subordinate Financing is important in the fact of priority in case of default. Section III: Borrower Information: *Residency must include up to 2 years history and be specific if renting or owned. *SSN, age and number of dependants are also in this section. Section IV: Employment Information: *Need 2 years work history and current employer's information must be provided. The application also asks for "years employed in this line of work/profession" *Self-employment also need to be specified in this section. Section V: Monthly Income and Combined Houseing Expense Information: *This covered all the information required to calculate the applicants DTI. *Other sources of income must be documented if they are used for qualification including: -Regular full or part time job, including second jobs -Social Security -Child Support -Alimony -Investment/rental property income *Housing expenses should include mortgage payments, property taxes, association or condominium fees, mortgage insurnce and homeowners/hazard insurance payments. Section VI: Assets and Liabilities: This section is used to calculate the borrower's net worth. Originator needs to be sure to ask if applicant is combining assets with a spouse, partner or other co-borrower in order to qualify. If no, they must check "Not Jointly" *Liquid assets includ: -Deposit or "Earnest Money" -Cash -Checking accounts with account #s -Savings accounts with accounts #s -Stocks and bonds; and the applicant can state how much they believe they are worth. If the value becomes an important factor in securing the loan, the lender may ask for an investment statement. -Cash value and face value of life insurnce policies *After the itemzation of "liquid assets", the application gives space for the non-liquid asset: -Real estate -Retirement accounts (IRAs, 401Ks, etc) -Net worth of businesses -Automobiles *The space for "Other Assets" may include personal property. "Total Assets" include the grand total of liquid, non-liquid and other assets. *Liabilities include: -Medical Debt -Credit Cards -Mortgages -Judgements -Consumer loans -Student loans -Alimony payments -Child support payments Section VII: Details of Transaction: This is used for specific information about the proposed transaction such as how much money the borrower will need in order to get the loan to closing. The following information is detailed in this section: -Purchase Price -Alterations, Improvements, Repairs; estimated costs -Land; the cost of land, if purchased separately, from the cost noted in the purchase price. -Refinance; debts to be paid off in a refinance -Estimated Prepaid Items; items paid in advance such as homeowner's insurance, escrows, interest and tax payments -Estimated closing costs; origination fees, processing fees, appraisal fees, title fee and recording fees -PMI, MIP, Funding Free; What borrowers pay for PMI, upfront MIP or funding fees (VA) based on the type of transaction. -Discount; charge paid by the borrower to reduce the interest rate on hte mortgage. A point is 1% of the mortgage. -Total Costs; all the above items added together to get the estimated cost of the loan -Subordinate Financing; financing that the borrower will receive in addition to the loan amount identified in Section I of the 1003 which may include a second mortgage or HELOC -Borrower's closing costs paid by seller; contributions that will be made by the seller to the borrower at the time of closing. -Other credits; may appear as a grant, a gift, a broker's credit or lender's credit -PMI, MIP, Funding Fee financed; these fees can either be paid by the borrower out of pocket or it can be financed into the loan. -Loan amount; identified in Section I of 1003 -Cash From/To Borrower; subtrating the cost of the loan from the credits. The result is what needs to be communicated to the borrower prior to closing, after preparing the final 1003. The amount may vary slightly but it will serve as a good estimate. Section VIII: Declarations: Contains questions that enable a lender to determine if the potential borrower is subject to other matters that may impact his or her ability to repay the loan such as: -Outstanding judgements -Involvement as a party to a lawsuit -Financial obligations as a cosigner or endorses on a loan for which another borrower is principally responsible -Obligations to repay money borrowed for use as a down payment in the current transaction -Obligations to pay alimony or child support *They must make other declarations that serve as evidence of their financial responsbility including: -Bankruptcies within the past 7 years -Foreclosure withint the past 7 years -Surrender of deed in lieu of forecosure within the past 7 years -Delinquencies of federal debt, which would include student loan debt -Onwership interest in another property within the past 3 years (answering this question is only required if the loan applicant intends to occupy the dwelling that will secure the present loan as their PR.) *The declarations also require the loan applicant to disclose their status as a US Citizen or as a permanent resident alien. *It is important to remind the borrower that the questions must be answered truthfully and completely, and that untruthful responses may be considered fraud, subjecting the applicant to prosecution. *The lender must verify the responses via 3rd party verification. If this reveals something contrary to their response the applicant should be notifie and the 1003 should be adjusted accordingly Section IX: Acknowledgement and Agreement: This allows the applicant to affirm that they understand the purpose of the loan application and any loan is offerred as a result of the application will be secured by a deed of trust on the property described in the application. Section X: Information for Government Monitoring Purposes: This section is referred to as the Home Mortgage Disclosure Act (HHDA) section. It requests info regarding race, sex and ethnicity and states that it is not used to discriminate but to monitor lenders to be sure there is no bias. Applicants must be made aware of the loan status in writing withint 30 days of the date of application. Evidence of this must be kept in the loan file.

Servicing

Once the file is returned to the lender by the closing agent, loan servicing begins. In addition to accepting loan payments, the servicer is responsible for: *Disbursing funds out of the escrow account to pay taxes and insurance *Maintaining records related to payments and balances *Managing delinquent accounts *Helping borrowers to identify loss mitigation options when delinquencies and defaults occur RESPA's disclosure rules require lender to identify the loan servicer for the borrower; this information is included on the Loan Estimate. The statement discloses to the borrower whether the lender intends to sell or transfer the loan servicing to another servicer. The statement must be provided to the borrower within 3 business days of receiving the loan application. If a loan servicer transfers or assigns the right to service the loan, the servicer must notify the borrower at least 15 days before effective date. If the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized by the new servicer. RESPA now includes new servicing rules that are intended to improve the servicing of mortgage loans with requirements for crediting mortgage payments promptly, resolving errors quickly, responding to borrower inquiries within specific timeframes and facilitating loss mitigation efforts

Underwriting

Principal responsibility is to ensure the proposed loan meets the requirements set forth by the investor who will purchase the mortgage including assessing a borrower's ability and willingness to repay and examining the property being offered as security. Much of the underwriter's decision making is now done by an automated underwriting system (AUS) It is the underwriter's responsibility to make sure the information entered into the AIS is the information provided on the URLA and all information is documented and accurate. It is the originator's responsibility to ensure that the loan file includes all information and documentation necessary to aid the underwriter. The major areas the underwriter examines are credit, income, assets and collateral. *Lock In Agreement: Rate lock agreement or rate commitments are agreements made by a lender to hold an interest rate and a specified number of points while processing an applicant's loan. Lenders may charge a flat fee or a percentage of the mortgage amount, payable upfront or at the time of closing as lock in fees. Some lenders may finance the fee by adding a fraction of a percentage point to the interest rate. Lock in fees may not be refundable. They may be effective for as little as 7 days from the date of the loan approval up to 120 days; most are effective 30-60 days. If an appliant's loan is not settled and funded within the period of time that the agreement is effective, they will obtain a loan at the current rate. Extensions may be approved by the lender, and a fee is charged for the extension but it is usually worth the effort and cost so the applicant is guaranteed the interest rate to which they agreed. Float Arrangement: Lenders may allow loan applicants to lock in an interest rate without locking in the points. This is a type of float agreement. It benefits the applicant if points fall. However, if interest rates also fall, the lender may charge extra points to make more money from the transaction. Lenders can also agree to float both allowing the applicant to lock in the rate and points between the time of application and the date of closing. The applicant can choose to lock in the rate and points at the time that appears most advantageous to them. Income Analysis: The underwriter not only looks at the length of time an applicant has been working, but also how long they have been with the same employer. Originator should document any job gaps or lack in lenth of time on the job. The underwriter will review the W-2s and 1040 to evaluate income consistency. If applicant is self-employed or commissioned, the underwriter will look at the 1040sf or the non-reimbursed employee expenses or Schedule C and the adjusted gross income. Any substantial increase or decrease in income must be addressed. Underwriter can even ask for current P&L statements. If the applicant must pay quarterly taxes, the originator must include proof of payment. They will also calculate other non-taxable income and confirm that the correct adjustments have been used. They must pay attention to "grossing up" on the income. They will also review the 1040s for other income or expenses not documented in the loan file. This may include rental income (Schedule E), self employment tax and income (Schedule C), farming expenses and income (Schedule F) and corporate or partnreship returns. For rental income, the originator must include documentaiton to support the rental amount. This may include a current lease or rental agreement. Typically the underwriter will use 75% of rental income stated on the agreement unless otherwise documented by the 1040s. If there is a negative rental income, it will be treated as a liability. Assets - Cash to Close the Transaction: The cash investment in the property must equal the difference between the amount of the mortgage and the total cost to acquire the property. All funds must be documented and verified During the underwriter's examination an applicant's history and use of funds will also be reviewed. They will look for insufficient funds, use of credit lines, undisclosed loans, large deposits and debits that may suggest undisclosed debts. These must be addressed by the applicant and originator in the loan file. If funds are from proceeds of the loan applicant's current home, the underwriter may ask to see evidence in the form of a closing statement. If the property has not sold at the time of underwriting, loan approval may be conditioned upon verifying the applicant has actually received the proceeds. Stocks, bonds, 401Ks and retirement accouts may be counted but the percentage that can be used may vary. Fannie's guidelines state that when used for the down payment or closing costs, if the value of the asset is 20% more than the amount of the funds needed, documentation is not needed The Subject Property Collateral: Underwriter must enture the property is eligible and meets lender guidelines by the appraisal report, preliminary title report and any inspections requested by the prospective borrower or required by the lender. The Underwriting Review of the Appraisal: The appraisal report is used to determine the value o fhte property being mortgaged and to identify deficencies. Underwriter looks to confirm that the names, address and property description are accurate. The originator should check this information before submitting the loan application. Errors caught up front will eliminate the problems during underwriting. An underwriter will look at the floor plan (footprint) to check for functional obsolencence of the property. Photos will be looked over carefully. Underwriter is looking for any visible signed of health and safety hazards of damage to or near the property that could affect the collateral. Safety Issues: If a manufactured home the underwriter will check to make sure the tags required by HUD are noted on the appraisal and evidence is requred to prove the manufacture home is titled as real property and not personal property. A Structural engineer's certificate may also be required. The Originator needs to make sure that they knows the lender's guidelines regarding manufactured homes prior to submitting the loan file to underwriting. If the property befinanced is a new home under construction, the underwriter will require a completion notice from the appraiser. They may also require proof or evidence by the building authority. Originator should be awre of this, plan ahead and order these items before the scheduled closing date. This will avoid last minute delays. Flood Zone Verification: Underwriter will also verify the flood zone to ensure that if the property is in a flood prone area, the the proper flood insurace is i place to protect the collateral and purchase. Other Required Inspections: The underwriter may ask for verification that repairs were done or require further inspections to be performed to ensure the collateral lender or to meet program guidelines such as those in an FHA or VA. This may include termite, well, septic, roof or other sinpections noted on the appraisal. Common Underwriting Pitfalls: All of the following are common underwriter pitfalls to whcih loan originators should pay close attention: -Incomplete files with no documents to back up what is stated on the URLA -Inaccurate data. These are frequently just calculation errors in income or not using proper percentages for rental income, non-taxable ime or stocks, bonds and retirement statements. -Cash out refinance loans submitted as no cash out -Property is not the applicant's PR -Qualifying ratios exceeded without compensating factors given -Obligations of all applicants; non purchase spouse not included, inaccurate or unreported borrower debt. -Insufficient assets to close transaction -Assets not documented -Applicant's income not calculated correctly -Applicant's income not substantially documented, such as self employment -Loan program not provided -New construction documentation not provided. This can result in delays in closing -Sales contract not fully executed by all buyers and sellers -Major repairs needed and not addressed in loan file -Repair or compliance clearances not provided according to sales contract or lender guidelines -Alimony or child support not included in debts -Secondary financing not disclosed -Real estate obligations not disclosed -Delinquent federal debts that showed up on title report but not credit report (in the case of a refinance) -Incorrectly calculated loan amounts The importtance of having a complete and accurate URLA and sufficient documentation in loan files cannot be overstated.

Suitability of Products and Programs

"Loan suitability" is a term that refers to the diligent matching of loan programs with the financial circumstances of the consumers. Provisions of the Dodd-Frank Act encourage consumers to make safer borrowing choices by requireing homeownership counseling for riskier loan products, in addition to the ATR and QM Rules to ensure loan suitability for consumer participating in the mortgage market.

How is Credit Identified

Consumer Reporting Agencies (CRAs) gather and sell information regarding an applicant's credit in the form of credit reports. This informatio is available to individuals who are entitled to a free credit report annually, when they request one. It is also available to creditors, employers, insurers, banks, lenders and simliar entities. It evaluates the financial responsibility of prospective borrowers. The highest level and most detailed report is a Tri-Merged Report using data from the three major repositories; Experiena, Equifax and TransUnion (The Big Three). The ability to cross verify information that the repositories report with the information the customer provides is key to loan integretity and fraud prevention. The credit report will provide the following: -Applicant information -Content summary of the report -Credit scores -All known public records -Filed collections actions data -Deragatory trade lines information -Credit Inquiries -Fraud verification alert information In general, account information, including late payments and other adverse information reported by creditors, is kept on a credit report for no longer than 7 years. There are some exceptions: -Bankrupty information may remain on credit reports for up to 10 years -Unpaid tax liens might, depending on where the applicant lives, remain on credit report indefinitely -Certain states require that adverse credit information remain on credit reort no longer than 5 years. Getting Permission to Access Credit Information: A loan originator must have a "permissible purpose" according to the federal Fair Credit Reporting Act (FCRA). This includes a mortgage lender's need for a consumer's credit history. How is the Information Formatted and Provided? Different CRAs provide a varied menu of servics, including those that compile informaiton from "The Big Three" and combine it in an easy to read format. How is a Credit Report Evaluated: Carefully check all identifying information. Multiple name spellings, addresses, or SSN suggests errors in the reort or possible identity theft. Originators should alert the applicants of these types of descrepancies. The originator may need to solicit the help of a title agent and/or a court clerk to resolve inaccuracies. If a lender decides not to make a loan based on information found in a consumer report, the Faire Credit Reporting Act requres the lender to advise the loan applicant that: -The CRA did not make the decision to deny the applicant -The consumer has a right to a free copy of their credit report -The consumer may contact the CRA to dispute the accuracy and completeness of the report Tax Liens and the Credit Score: If tax liens go unpaid, they will remain on a credit report for 15 years or more. Paid tax liens remain on a credit report for 7 years Credit Accounts: Credit accounts greatly impact a consumer's credit score and provide insight into the credit Character for loan qualification. The following areas are typically found in the credit account section of a credit report: -Company Name; of the creditor -Account Owner; indicates whether the consumer is a joint owner, auhtorized user, co-signer, etc. -Date Opened; the month and year the account was established. -Date Reported; date the last report was made to CRA on the account; this can be an area of importance if there has not been a recent report establishing up to date payments. -Months reviewed and Date of Last Activity -High Credit; usually means the credit limit on the account -Balance and Past Due Amount; amount the consumer owes and any amount that has been reported past due -Types of Account; such as open (for utilities), revolving (credit cards), installment (car loans), etc. -Timeliness of Account; the consumer's paymenet history. As a rule, the following codes correspond to timelines: 0 = Credit is open but has not been used or reported 1 = Paid on time 2 = 30+ days past due 3 = 60+ days past due 4 = 90+ days past due 5 = 120+ days past due 6 = Making payments via wage garnishment 7 = Repossession 8 = Charged off bad debt Identifying Problems in the Credit Report and Fraud Alert: Examing the credit report is the originator's first line of defense to identify potential discrepancies and fraud. The Federal Trade Commission's Red Flags Rule requires financial professionals to identify and mitigate instances of identity theft as they pertain to credit reports. Some standard underwriting red flags, as well as red flags established by the FTC include: -Recently opened accounts -All balances in round numbers -Changes of address, especially recent -PO Box addresses -Recent payoff of a large number of accounts -Misspellings and errors -Large numbers of recent credit inquiries -Uncharacteristic use of credit or sudden increase in use of credit -A credit history that does not match the consumer's age. Under current federal law, all participants in the application and submission of a fraudlent loan are liable regardless of when the fraud was subsequently discovered. The Credit Score and Credit Risk: A national credit bureau is beneficial because consumers will not lose any of their solid credit history simply because they have moved to another part of the country. Likewise, moving will not rid them of a negative credit history. The Big Three are separate and competitive companies and as such, they do not share information. -Not all lenders report to all three of the CRAs: -Even if every lender DID report to all 3 CRSs the information would probably be different; lenders that do report to all three credit bureaus do so by sending data tapes to them each month. Credit Bureaus do not receive or "run" the tapes at the same time. As such, account information may be different at each CRA depending on the time of the month. -Not all lenders pull a credit report from all 3 bureaus when they are processing a credit application. The exception to this rule is that most mortgage lenders will pull all 3 credit reports during their loan processing practices.

Key Elements of Title

The title history is composed of recorded instruments on the land records on each property and other statuatory interest such as tax liens and mechanics liens. Each record tells a story on the property such as when the property was acquired, the amount it was sold for, etc. It is the job of the title company to review this information and identify any defects that are in the title history. These defects must be cured prior to closing, or the title company may elect to insure over them. A defect on title can be anything from a lien or judgement to a break in the chain of title. Real Property versus Personal Property: Real property is comprised of land in a permanent fashion, such as a trailer that is permanently affixed to property versus not. Liens: An involuntary lien is one that is placed on a property due to debt. *Priority of liens: -Generally, real estate taxes and special assessment take priority over all other liens -Other liens follow in order of recordation. -There are some exceptions particularly for mechanic's liens which can relate back in time even though filed or recorded later in time -Subordination agreements between lien holders can change priority Title Theory States: In title theory states, a deed of trust is executed and the borrower (grantor) conveys legal title to the trustee while retaining equitable title. The lender is name as the benficiary of the trust. The trustee holds title to the property until the loan is repaid. If default, the trustee is empowered to sell the property and apply the proceeds towards the debt. If no default, the legal title is returned to the homeowner on the ublic record either by a cancellation of the dead of trust or by the trustee recording a deed of reconveyance. The lender is repsonsible for ensuring the legal title to the home reverts or is returned to the homeowner and the lender no long has any legal or beneificla interest in the property If a mortgage is used for the security instrument, the borrower conveys legal title interest in the property to the mortgagee and retains equitable title and possession of the property. Should a default occur, unless the mortgage contains a power of sale clause allowing the mortgagee to sell the property to satisfy the debt, the lender must institute a forclosure proceeding in order to sell the property and apply proceeds to the debt. Upon payment in full, the mortgagee must execute and record a reconveyance instrument of some sort to return full legal title to the borrower. Lien Theory States: In lien theory states the borrower retains both legal and equitable title. The mortgage is a lien agains the property. If default, the lender will be required to institute a forceclosure proceeding in order to obtain legal title to the property. When the lien is paid off the lender sends th emortgage and promissory note to the homeowner as well as as a release stating there is no longer a lien on the home. In some states, the lender will send the release directly to the county office recorder. Best practice is to ensure that public records ar ecleared before documents are provided to the homeowner. Foreclosure Proceedings: If a borrower defaults and faces foreclosure, the type of coreclosure proceedings that will take place depends on whether the home is in a lien theory or title theory state. In a lien theory, forclosure is a judicial process. In title theory states foreclosures are non-judicial because they do not take place within the courts and are likely to proceed more rapidly. Legal Title Granted via a Mortgage: Having "title" means the consumer has the legal right to access and use their real estate and any dwelling on the property. A deed is a legal document that transfers title from one party to another. When the home does not serve as security for a mortgage, and it is not subject to liens by other creditors, a title search will reflect no recorded liens and show the owner has "clear title" to the property. Subordination Agreement: A subordination agreement is a document that changes the order of priority. In some instances , the subordinating lender may require a processing fee. The subordination agreement may be prepared by the title company or hte subordinating lender. Ultimately, the agreement must be recorded with the new deed of trust to ensure priority.

Appraisals

A licensed appraiser must prepare the appraisal. URAR/1004: The Uniform Residential Appraisal Report (URAR) or 1004 is the most common and comprehensive appraisal form. Typically used on all single family homes and may be used for row homes and townhouses if the property is situated on a fee simple lot. Other commonly used appraisal forms include: -1004d; used to update appraisals and report certifications of completion -1007; used for single family properties which are intended as investment properties -1025; used for 2 to 4 unit properties intended as investment properties -1073; used for condiminiums, PUDs and row homes/townhouses situated on common ground It should be noted that additional or alternate documentation may be required in certain cases for FHA and VA loans. A property inspection waiver is occasionally permitted instead of a full appraisal for certain refinances such as a borrower refinancing their property within a specific time after a previous loan transaction. This would be a "drive by" appraisal.

Verification and Documentation

After completing a loan application the applicant must provide documentation to support the information. This is required by the ATR Rule and must be made using reasonably reliable 3rd party records including: -Requests for Verification of Employment (VOE); If the applicant is salaried and is not self-employed, he or she will sign a VOE which is then forwarded to the applicant's employer for verification of employment and income. If the applicant has not been employed there for 2 years a VOE will be signed and sent out to the previous employer as well. Lenders may also request W-2 forms, pay stubs and tax forms. Lenders are less likely to consider overtime and bonus pay as part of an applicant's income unless they can show it has been received consistently over the last 2 years and the employer indicates that it will most likely continue. - Requests of verification of deposit (VOD) needs signed by the bank or depository institution verifying the applicant's balances and account history *The ATR Rule and QM Rule require verification of current or reasonably expected income or assests using: -Tax return transcripts issued by the IRS -IRS W-2 forms -Payroll statements -Financial institution records -Employer records -Records from a federal, state or local government entity stating the customer's income from benefits or entitlements -Receipts from a check cashing service or funds transfer service *Income that is not salary based will require other types of documentation including: -Commission income or self employment: -Commission income: income tax returns for past 2 years and information on current06) income is commissions represent 25% or more of an applicant's annual income. (Lenders will need to average the past 2 years income) -Income of self-employment applicants: must show they have maintained an income for two years in order to qualify. Lenders will request additional documentation including: -2 years tax returns -YTD P&L statement -2 years balance sheets -self-employment income analysis Reg Z's appendix Q provides guidelines for analyzing income from a broad range of sources including SS disability, income from family owned business, partnership and rental income. It also sets standards to determine if a consumer may relay on alimony or child support as sources of income. Verification of Income and Assets: Creditors must verify the income and assets via 3rd party records that provide reasonably-reliable evidence of the consumer's income or assets. Fannie offers a VOD form (form 1006). Consumers cannot "hand carry" the verification form to their bank. They may, however, personally deliver VOD forms for second lien transactions. Depository institutions must always send completed forms directly to the mortgage lender.

Disclosures

As a consumer protection measure, and as a legal compliance measure, the timing and accuracy of disclosures is an important component of loan origination. These disclosures are intended to: -Educate consumers -Provide consumers with information on loan costs -Notify consumers of risky lending terms -Notify consumers of their rights under federal lending laws -Ensure that consumers know the status of their loan applications -Give notice to consumers about changes in the servicing of their loans. Informational Disclosures to Educate the Consumer: Used to educate the customer so they can make better decisions when choosing between different products -Your Home Loan Tooklik: A Step by Step Guide (formerly known as the Settlement Cost Information Booklet) is required by RESPA and is due 3 business days from receipt of application for a purchase transaction. This reviews the settlement procesess and outlines the rights and protections that the law creates for borrowers. -CHARM Booklet is required by TILA within 3 business days of receipt of application for all ARMs to alert consumers to the risk associated with ARMs. -When Your Home is on the Line: What You Should Know about Home Equity Lines of Credit is required by TILA to be given to all loan applicants who are considering a home equity loan and is due at the time an application is provided to borrower. -List of homeownership counseling organizations: RESPA requires applicants receive a clear, conspicious list of homeownership counseling organizations no later than 3 business days after a completed application is received. They must be local to the consumer and provide relevant counseling services. List may not be more then 30 days old with given. Disclosures to Inform the Consumer about the Costs of a Loan: These are intended to provide the consumer information they can use to shop competitively for a mortage loan and settlement service provider. Others are used to help consumers anticipate costs associated with a loan that will occur after closing and throughout the loan term. *Pre-closing disclosures include: -Loan Estimate; an estimated cost of credit and settlement services, must be delivered or placed in the mail no more than 3 business days after receipt of loan application and no later than 7 days prior to closing. -Closing Disclosure; states the actual costs of a loan and settlement fees replacing the HUD-1 Settlement Statement and TIL Disclosures for most loan transactions. This is due no later than 3 business days prior to closing. -----If a revised Closing Disclosure is issued, it must be provided at or before closing and within the days of receiving the information prompting the revision. Certain changes (APR, prepayment penalties or loan product changes) would require a new 3 business day waiting period before closing could occur. -Affiliated Business Arrangement Disclosure: required by RESPA and due at the time of the referral. This disclosure advises the consumer that the referral party and the settlement service provider share an ownership interest and the potential to realize some profit as a result of that ownership interest. -Re-disclosure of APR; for a regular transaction, re-disclosure is required at least 3 business days prior to closing anytime the APR varies by more than 1/8 of 1%. For irregular transactions, redisclosure is required if the APR varies more than 1/4 of 1%. *Post-closing Disclosures includ: -Initial Escrow Account Statements; required by RESPA and due 45 days after closing, but is often provided at the time of closing and provides an estiamte of escrow payments that will be required in the first 12 months of the loan. -Annual Escrow Account Statement; Required by RESPA, this disclosure on the amounts needed to cover escrow disbursements is due annually. -Escrow Closing Notice; thie is required prior to the closing of an escrow account. When a borrower requests cancellation of an escrow account, the notice is due 3 days before the closing of the account. When a creditor or servicer cancels an escrow account the Escrow Closing Notice is due no later than 30 business days before the account closes. -Initial Rate Change Disclosure: required by TILA for ARMs and is intended to provide borrowers with information to prepare them for the interst rate adjustments that will result in changes in payment amounts. It also provides an explanation of how the rate is calculated, disclose the index and the margin used to make this calculation and identify any caps that will limit the increase in the rate. It must be provided 12 days, but no more then 240 days before the initial rate change occur and the first payment based on the new rate is due. This disclosure can be made at closing if the first rate and payment changes are due within 210 days after closing. They should also advise them that subsequent rate change disclosures are generally due no less then 60 and no more than 120 days prior to an interest rate and payment change. The TIL Disclosures and the HUD-1/HUD-1A: Since 2015 the Truth in Lending (TIL) Disclosure and the HUD-1/HUD-1A Settlement Statement have been replaced by the Loan Estimate and Closing Disclosure in most mortgage loan transactions. However, in certain transactions (reverse mortgages, HELOCs, Chattel-dwelling and loans made by entities that are not creditors under Reg Z) The TIL Disclosure and HUD-1/HUD-1A are still used. The TIL Disclosure provides consumers with the cost of credit expressed as a dollar amount and the APR. The initial TIL Disclosure is due within 3 business days after receiving a completed application. The Final TIL Disclosure is due no later than the 7th business day before closing The HUD-1 Settlement Statement is due at closing but may be requested by the consumer one day prior. This is used for refinance transactions. It conveys to the borrower the final costs related to the mortgage loan transactions. It lists fees and charges related to the loan, including buyer's debits and credits, amounts due from the borrower, sales price, settlement charges, yield spread premiums and more. Disclosures to Advise Consumer of Risky Lending Terms or Agreements: Some disclosures are offered to consumers to make certain they understand the risks associated with specific types of lending terms and agreements: *Balloon Payment Notice: required by HOEPA and due at least 3 business days prior to closing. Notice regarding the presence of a balloon payment provisions is also required on the Loan Estimate for all residential mortgage loans. *Notice regarding insurance premiums: required by HOEPA for a mortgage refi if the "amount borrowed" includes financing to cover optional insurance products. This notice is intended to prevent "packing" the costs of unnecessary insurance in high cost loans. *Notice that completion of loan application and receipt of disclosure does not obligate borrower to complete transaction: was previously only required with HOEPA loans, it is now required by TILA and due within 3 business days of applicaiton. The signature line for the Loan Estimate reminds consumers that they are not required to accept a loan imply because they have signed the disclosure form. If the loan involved is a high cost mortgage, the disclosure must also warn the consumer of the risks of losing their home when signing a lending agreement for all loans. Disclosures to Alert Consumers of Their Rights: The purpose of some disclosures is to alert consumers to their legal rights that they are entitled to exercise within a certain time frame. *Notice of Right to Receive an Appraisal: this disclosure is due no later than 3 business days after a creditor receives an application for credit secured by a 1st lien on a dwelling. *Notice Regarding Monitoring Program: required by ECOA and due when obtaining information on race, sex, ethnicity, marraige and age. *Notice of Right to Rescind: Required by TILA and due at the time of closing in transactions not related to a home purchase or to a refi with the lender who made the loan being refinanced. *Notice of Right to Cancel PMI: Required by the Homeowners Protection Act at time of closing and in annual disclosures. The annual disclosure must be in writing and remind the borrower of the right to cancel PMI. It must also provide an address and phone # the borrower can use to contact. *Notice of Right to Receive Credit Score and Dispute Its Accuracy: Required by FACTA and due during the loan transaction. *Notice of Right to Fianncial Privacy and Right to Opt Out of the Sharing of Personal Information: Required by GLB Act at the time of establishing a customer relationshipo (application) Disclosures to Alert Customers about the Status of a Loan Application: *Notice of Action Taken: ECOA and due no later than 30 days after the receipt of loan application. *Notice of Adverse Action: ECOA and due no later than 30 days after receipt of loan application *Notice of Incomplete Appliation: ECOA and due no later than 30 days after receipt of loan application Disclosure Relating to Loan Servicing: RESPA creates a set of disclosures to ensure borrowers receive notification if there are any changes related to the servicing of their loan. *Mortgage Servicing Disclosure Statement: required by RESPA due 3 business days after completion of a loan application. It now appears on page 3 of the Loan Estimate. *Servicing Transfer Statement: required by RESPA and due 15 days prior to the effective date of the transfer. Revised disclosures related to closing costs are subject to restritions and are outlined in the Federal Mortgage-Related Laws module of this course. They encourage accuracy in providing Loan Estimates and discourage making changes to stated settlement cost estimates. There is one circumstance in which a creditor MUST provide a revised Loan Estimate; this occurs if the rate was not locked at the time of the original Loan Estimate. When the rate is subsequently locked, the creditor must provide a revised Loan Estimate with the locked interest rate. This is due no later than 3 business days after the date the rate is locked. There are other circumstances in which new disclosures may be required. TILA requires re-disclosure of the APR if it varies by more than 1.8 of 1%. This is due at least 3 business days prior to closing. Also, if the borrower decides to switch from a fixed rate to an ARM. In this scenario the updated Loan Estimate as well as the CHARM booklet and program disclosures related to ARMs. Disclosures Related to Reverse Mortgage Loans: TILA disclosure requirements for standard mortgage transaction also apply to reverse mortgage loans. Disclosure for open ended, closed end and variable rate mortgage must also be provided as applicable to reverse mortgage loan applications. TILA also requires that a Loan Cost Disclosure Form be provided to reverse mortgage borrwers. This form includes the total annual loan cost, which incorporates all of the following: -Upfront costs such as origination fee, 3rd party closing fee and any upfront mortgage insurance premium -Interest -Ongoing charges (monthly service charges) Delivery Method: Many disclosures under TILA and RESPA are due within 3 business days after completion of a loan application. For mail this is considered to take place 3 business days after disclosures are placed in th email. The E-sign Act allows creditors and other mortgage professionals to make disclosures electronically when they consent. They are considered received when acknowledged (opened) by the customer.

Qualification: Processing and Underwriting

Borrower Analysis: *Assets and Liabilities Financial statements list an applicant's assets and liability side by side to facilitate the lender's assessment of the financial situation. The form includes a table for the itemization of liquid and non-liquid assets and liabilities. *Income: DTI requirement differ by proram but he AM Rule established a 43% DTI requirement for QM. However, until January 10, 2021 there will be some leniency enforcing the QM standards and "temporary qualified mortgages will not be subject to the 43% DTI. The QM and ATR Rules also include requirement for verificatio of income. Federal lending laws do not require borrowers to disclose all of their income. Just the income on which they are relying to show that they are eligible for the loan. Many lenders now require authorization from a loan applicant to conduct an interpendent verification of tax records. This is often performed for self-employed borrowers but is becoming more common with other types of borrowers. The IRS form 4506-T is used to obtain a transcript of tax returns. IRS form 8821 is used to authorize the relase of ther tax information. Income analysis can also take a number of other factors into consideration. Analysis factors such as econimic stability of a profession, potential increases in income due to education and training, relocation, and guaranteed bonuses can all be used to help a borrower. Verification of Income and Employment: Federal regulations require verification of employment income using 3rd party records. Fannie's form 1005 is typically used to VOE for position held, income earned and the probability of continued employment. Creditors may obtain 3rd party records directly from the consumer, but if the creditor intends to sell a loan to an investor, delivery of the information by the consumer is not permitted. Borrower Use of Gift Funds: Loan originators should be quick to explain there are veritification requirements in play. They must be met in order for the cash to be considered for qualification purposes. Lender will ask loan applicants to provide a letter than includes: -Description of the relationship between the applicant an donor -Statement that the gift funds must be used for a home purchase -The address of the home -Assurance that the donor does not expect repayment of the funds -Identification of the source of those funds -Signature of the donor A lender may also ask for a copy of the gift donor's bank statement, a withdrawal receipt, a deposit receipt and a coyp of the applicant's bank statement showing where the funds went into the account. If this loan will be sold to Fannie, it is important to be aware, according to GSE's standards the donor must be a relative, fiance or domestic partner of the recipient. Gift funds from builders, developers, real estate agents or any other party with an interest are prohibited. Simultaneous Loans: Federal regulations define a simultaneous loan as a loan that will be: -Secured by the same home -Made to the same consumer, and -Closed at the same time or prior to the principal transaction or made immediately after the principal transaction in order to cover its closing costs. (piggy backing) Income Calculation: A pay stub will provide most of the needed information but the originator will need to ask questions about the frequency of any overtime pay, how the employer handles vacation time and when the potential buyer last received a raise. *Hourly (base rate) x ((hours) = (weekly base income) (OT rate x (OT hours) = (OT weekly income) (weekly base) + (OT income) = (weekly income) (weekly income) x (weeks worked) = (annual income) (annual income) / (12) = (monthly income) OT can only be used to qualify for a loan if the applicant can show a history of receiving OT and the employer verifies that it will likely continue. Annual vacation days are included at the base rate. *Bi-Weekly Salary You will need to know the applicant's salary and how the vacation time is treated. (There are 26 bi-weekly pay periods in a year.) (bi-weekly salary) x 26 = (annual income) (annual income) / 12 = (monthly income) If the applicant does not receive a paid vacation, determine the typical number of days they take off each year and subtract that income from the annual income before calculating the monthly income. Also, there is a difference between bi-weekly and semi-monthly. Bi-weekly has 26 pay periods and Semi-mnthly has 24 pay periods. *Annual Salaries (annual income) / 12 = (monthly income) *Self employed, commissioned and trade workers Their income is usually average out over a 2 year period. For the self-employed, the originator uses the income shown on the individual's tax return. For commissioned and trade workers, the originator uses the income shows on their W-2 form. In both cases the calculation begins with adding the income from the previous 2 years and dividing it by 24. ( year 1 income) + (year 2 income) = (income base) (income base) / 24 = (monthly income) Remember to add back into the annual income those expenses that will not recur and any decpreciation when determining the appliant's annual income (such as relocating an office) *Other Income Annual bonuses, summer income or other recurring additional income may be averaged over 2 years and included in the applicant's annual income prior to calculating the monthly income. Child Support and Alimony may be used if it is court ordered and the applicant can show a stable history of receiving the payment. -Employment gaps: applicant may be asked to provide a letter of explanation documenting the reason(s) for the gap of employment, allowing consumers an opportunity to explain their circumstances. Credit Report: The Fair Isaac and Company (FICO) of credit scoring software in the early 1990's produced what is purportedly an objective credit score. Credit scoring systems have reduced the ability of creditors and originators to use experience and instinct to make lending decisions. Fannie Mae uses Desktop Underwriter and Freddie Mac uses Loan Prospector (recently renamed Loan Product Advisor).

Qualifying Ratios

Calculations considering income, credit history, credit scores, assets and liabilities. After verification is complete the lender applies mortage industry formulas, such as DTI to determine the size of the loan for which a loan applicant may qualify. Defining Capacity: Capacity refers to a borrowers ability to repay based on their current financial situations. This requires careful review of their current debt obligations. DTI plays a big part in analyzing the ability to repay the loan. Evaluating Applicants Using the Front End Ratio: This is also known as the housing ratio. It compares the monthly housing expense (PITI) to monthly income. For a convention mortgage loan that conforms to Fannie and Freddie guidelines the maximum front end ratio has traditionally been 28%. Front end ratios for FHA and VA loans are less difficult to meet. Applicants for FHA loans need 31%. Lenders who make VA loans look primarily to the back end ratio. Evaluating Applicants Using the Back End Ratio This compares the total monthly obligations to total money income. Fannie and Freddie traditional guildelines have a maximum back end ratio of 36%. That is now only used for loans that are manually underwritten, with the flexibility fo a ratio of up to 45% if the borrower has compensating factors such as credit score, reserves. Otherwise the Fannie Mae Selling Guide recommends a maximum of 50% The back end ratios for FHA is 43% and VA is 41%. Some lenders of nonconforming loans have allowed the ratio to be as high as 55%. Under the QM Rule a mortage cannot be a QM if the DTI exceeds 43% The specific informaiton required for the calculation for QM is in Appendix Q to Part 1026; Standards for Determining Monthly Debt and Income. These are based on FHA standards, which are outlined in the HUD Handbook that is used to verify monthly debt and income when underwrinting FHA loan.s Using the Appraisal to Calculate the LTV Ratio: Dividing the amount of the mortage by the appraised value or the purchase price of the home, whichever is less. (Purhase Price) - (Down Payment) = (Mortgage Amount) (Amount of Mortgage) / (Purchase Price = LTV Fannie and Freddie will not accept LTV that exceeds 80% unless PMI is purchased. The LTV for FHA and VA loans is higher than the LTV for conventional mortgages. FHA can be as high as 96.5% unless the purchase is more than $625,500 when it is limited to 95%. The limit for some VA loans is 100% Combined LTV Ratio (CLTV): This calculation is used when a borrower requests a 2nd mortgage by combining the costs of all mortgages on a loan and comparing that to the value of the home. (1st Mortgage) + (2nd Mortgage) /(Appraised Value) = (CLTV) High LTV Ratio (HLTV): This is used when a borrower has a 1st and a HELOC with the balance not fully drawn, which produces a lower CLTV and a higher HLTV. Studies show that the default rate is higher on high LTV, CLTV and HLTV loans and the lender may not be able to recoup the losses.

Financial Calculations Used in Mortgage Lending

Periodic Interest: The periodic interest rate, aka the nominal rate, is the amount of interest calcuated each payment period when the payment periods occur more frequently than the quoted rate. The annual rate must be converted to a periodic rate in order to calculate the interest due for that month. The formula to calculate the priodic rate is as follows: (Annual Rate) / (Number of payments in a year) = (periodic rate) Once the periodic rate is established, the interest compounded for that month is determined by multiplying the periodic rate by the balance of the loan: (Periodic Rate) x (Loan Balance) = (Periodic Interest) Credit card payments also use the "periodic interest" formula; however, the interest is often compounded daily and based on the APR so the formula would look like this: (APR) / (365) = (Periodic Rate) Next multiply the periodic rate by the current balance: (Periodic Rate) / (Current Balance) = (Periodic Interest) Interest Per Diem: Per diem, or daily interest, is calculated by dividing the annual interest rate by the number of days in a year, then multiplying the result by the outstanding balance. Many lenders will use 360 days, but some require the use of 365/366 days. Originators must be sure to know what his or her lender requires before making the calculation. (Interest Rate) x (Loan Balance) = (Annual Interest) (Annual Interest) / (365) = (Daily Interest Amount) If the loan is amortized, the per diem interest will change every month as the loan balance declines. For the figures included on the Loan Estimate, the calcuation is made on the anticipated loan amount. Generally, loans are amortized using a 30 day month or 360 days in a year, and interest is collected in arrears. So to get the loan on schedule with payments, per diem interest is collected at closing to put the loan on schedule. Payments (PITI, Mortgage Insurance): Amortized mortgage payments are calculated using a financial calculator designed to compute loan amortizations. Calculating payments is generally a very simple process. Based on the calculator, the originator will enter the total loan amount, interest rate and loan term. Many financial calculators allow a person to enter any 3 of the variables to return the fourth. A more important calculation to borrowers is the PITI payments. Calculating Taxes: They are typically obtained as an annual, semi-annual or monthly amount. They are based on the locality where a property is located. The annual tax amount is divided by 12 to arrive at a monthly tax payment (semi-annual is divided by 6), which can be added to the P&I payment or entered along with the other variables into a financial calculator: (Annual Property Tax) / (12) = (Monthly Property Taxes) Calculating Mortgage Insurance: This varies based on the borrower's LTV ratio and the type of loan being originated. Fixed rate loans will have a diferent mortgage insurnace rate than an ARM. This is true for both PMI and MIP. HUD sets the rates for FHA insurance. Changes to MIP rates are made through the issuance of Mortagee Letters, and loan originators shoud visid HUD.gov to follow these and other changes related to FHA lending. PMI is used to cover the risk of making a lon to a consumer who lacks the cash for a significant or sufficient down payments. (Loan Amount) x (Mortgage Insurance Rate) = (Annual PMI) (Annual PMI) / (12) = (Monthly PMI) Monthly PMI can be added along with monthly taxes and monthly homeowners insurance t a P&I payment to arrive at a PITI payment. Down Payment: This is a component of determining LTV for the purposes of various loan programs or for figuring a maximum loan amount. Such as FHA borrowers are required to have a 3.5% investment/down payment in their loan transaction. Conventional lenders usually require borrowers to pay PMI with a down of 20% or less. Loan To Value (LT.V): There are 2 LTV calculations. The first is LTV the second describes a relationship between all liens and encumbrances and the property value. This is combined loan to value (CLTV). (1st Loan Balance) + (2nd Loan Balance) + (all other balances) = (Total Encumbrances) Debt to Income (DTI): The front end ratio (housing ratio) is all monthly expenses housing related and dividing them by gross monthly income. Back end Ratio or total debt ratio involves all monthly obligations payments divided by gross monthly income. Unless there is evience of a higher minimum payment, Fredd and many other investors require the use of 5% minimum payment on revolving debt. In order to origination a QM, the borrowers DTI may not exceed 43%. Temporary and Fixed Interest Rate Buy Down (Discount Points): Temporary and permanent fixed interest rate buy downs are handled differently. In a fixed interest rate buy down, the borrower pays fees to permanenetly reduce the note rate of a loan. For instance, the lender may offer an interest rate of 7.75% with no discount points or a rate of 7% with 3 points. The "three points" are equal to 3% of the loan amount and are paid as closting costs which affect the APR of the loan. A temporary buy down is created when funds are placed in escrow to offset the monthly payments required by the term of the loan. The escrow funds reduce the payment ate for a period of time, but not the note rate. Closing Costs and Prepaid Items: Fee associated with loan closing, fees owed to state and local government for real estate related transactions and prepaid items such as per diem interest are funds that a borrower often needs to have available at closing. Determining the amount of money that needs to be brought to closing by the buyer in a purchase transaction or owner in a refi is calculated as follows: (Loan Amount) - (Payoff) - (Financing Costs) - (Government Charges) - (Prepaid Costs) = (Cash needed or overage available as cash to borrower) Originators are absolutely prohibited from retaining any potion of the fee that is issued as a credit to the borrower. ARMs (e.g. Fully-Indexed Rate): ARMs are products that were not available until the 1980s. As a result of the financial crisis, Congress rewrote federal mortgage laws to require lenders to calculate periodic payments using the fully indexed rate. The CFPB has written regulations to implement these statuatory requirements, known as ATR Act. This requirement forces borrowers to consider whether they can make payments on ARM when rate adjustments lead to payment increases. Lenders are not only required to determine the ability of a borrower to repay a mortgage at the fully indexed rate, but also to make monthly, fully amortizing payments that are substantially equal. Types of ARMs: True ARMs have rates that adjust every year of the loan's term. Hybrid ARMs have an initial period which the interest rate (and payment) us fixed and not subject to adjustment. Common Features of ARMs: There are many type of ARMs, but all have common features including: *Periodic adjustment or changes in the interest rate after the initial rate expires *An adjustment period that determines how often the interest rate will change *The use of an index and margin to calculate the new interest rate *The use of rate adjustment caps The adjustment period for an ARM may be defined as the period between one rte change and the next. Typical adjustment periods range between 6 months and 5 years. *When it is time for a lender the calculate an interst rate adjustment it must add the index and the margin to cover the cost of its services and compensate for the risk associated with the loan. Numberous indices are used to computer interest rate adjustments for ARMs, and they include, but are not limited to: -The LIBOR (London Interbank Offered Rate) -----It is important to note that the LIBOR is being phases out of use and will no longer be in use by 2022 -The COFI (Cost of Funds Index) -The COSE (Cost of Savings Index) -The CMT (Constant Maturity Treasury Rate) Borrowers are encouraged to look at the margin that a lender set for a loan. Some lenders may use the borrower's credit rating to determine the margin for particular transactions. If a borrower has strong credit and the risk of default is low, the lender may use a lower margin. Higher marins allow lenders to cover the risk of transactions with borrowers who are less qualified. *Rate adjustment caps can assure borrowers that there is a limit to how much their interest rates can increase. Caps come in several forms including: -Periodic Rate Adjustment Caps; a cap that focuses on the amount that the interest rate is allowed to change from one adjustment period to the next and creates a limit on the size of the change. -Lifetime Caps; this establishes a maximum amount that the interest rate may increase over the life of the loan. -Payment Cap; These caps can come with a significant risk to borrower for negative amortization. Payment programs that lead to neative amortization are no longer allowed for -----HOEPA high cost home loans and -----Qualified ARMs And the borrower MUST complete counseling with a HUD approved counselor Using the Margin and Index: Must add them together. Qualified Mortgage Monthly Payment Calculations: When originating QM, creditors are required to: -Calculate payments of principal and interest -Take into account all mortgage related obligations defined to include property taxes, insurance premiums and homeowners association fees -Determine an amount that will result in fully amortizing payments that will pay off the loan balance by the end of the loan term The greatest difference between the rules for payment calculations for qualified and non-qualified mortgages is that the QM Rule allows for lenders to limit repayment analysis to the first 5 years of the loan term. When a transaction invoves a non QM , the ATR Tule requires creditors to consider repayment ability based on rate changes that may occur at any time over the entire term. Typically a lending agreement for an ARM will include interest rate caps to limit rate increases. The consideration of these rate caps is also different for QM and nonQM. If the ARM is a QM and a creditor is calculating the maximum rate of interest and payments that will result from that rate. consideration of periodic and lifetime rate caps is permitted. If an ARM is a nonQM and a creditor is calculating the fully indexed rate, consideration of lifetime caps is permitted under the ATR Rule, but consideration of periodic rate caps is not. (Scenarios on pages 337-339.

The Ability to Repay and Qualified Mortgage Rules

January 10, 2014 was when the ATP Rule was rolled out and requires residential lenders to consider the aiblity to repay before extending credit. The only mortgage loans that are not subject to the Rule are: -Open end home equity plan -Reverse Mortgages -Bridge Loans with terms of 12 months or less -Construction loans -Loans made by a housing finance agency If a creditor wants to obtain the protections from liability that come with a qualified mortgage, it must comply with the requirements to assess the ability of a borrower to repay a loan and meet the product prerequisites of the QM Rule. This means the loan may not: -Have a term of more then 30 years -Feature negative amortization, interest only payments, or balloon payments -----There are some limited exceptions to the balloon payment prohibition -Include points and fees that exceed the cap set, based on the loan amount (typically 3%) *The underwriting requrement for non-qualified mortgages, made in compliance with the ATR Rule, and QM, made in compliance with the QM Rule have some similarities including the requirements to consider the loan applicant's: -Current and reasonably-expected income or assets, other than the value of the property securing the loan. -Employmnet -Credit History -Current debt obligations - Mortgage related obligations for the loan sought -Payments on any simultaneous loans that are or will be secured by the same dwelling Under the QM Rule the DTI may not exceed 43%. The ATR Rule does not limit the DTI. The CFPB wrote the ATR Rule to establish a less rigid underwriting standards for non-qualified mortgages to avoid limiting access to credit for consumers who are unable to meet the stricter standards required for a QM. The calculation of payment is also different for QM versus non QM. Payments for QM must be calculated based on the maximum interest rate that may apply to the loan within the first 5 years after the date the first payment is due. Payments for a nonQM must be based on the fully indexed rate, which takes into account potential rate changes for the entire term.

Special Appraisal Requirements for Higher-Priced Mortgage Loans

The 2010 Dodd-Frank Act addressed appraisal abuses, which were particularly common with more expensive mortgages. CFPB established a category of loans known as Higher-Priced Mortgage Loans (HPML). This is defined as a closed end loan transaction tha tis secured by a consumer's principal dwelling and has an APR that ex-ceeds the average prime offer rate (APOR) by: -1.5 percentage points, for 1st liens -2.5 percentage points, for 1st liens, non-conforming -3.5 percentage points, for subordinate liens *When a creditor is engaged in the transaction for HPMLs the appraisal for the dwelling that will secure the loan must be: -Conducted by an appraiser who is licensed or certified in the state in which the property is located and must be conducted in conformity wtih the Uniform Standards of Professional Appraisal Practices (USPAP) and applicable requirements under the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA) -Include a physical visit to the interior of the property *Inaccurate appraisals are often associated with property flipping which is not illegal. But it is illegal to purchase and resell a property using an inflated appraisal that is not based on actual improvements to the home. The rules for HPMLs address this problem by requiring 2 appraisals if a home is resold shortly after purchase and at a higher price than the seller paid for the home. The 2nd appraisal requirement is applicable when: -The seller acquired the home 90 or fewer days prior to the consumers agreement to purchase it and the price to purchase is 10% more than the seller paid. -The seller acquired the home 91-180 days prior to the consumers agreement to purchas it and the price to purchase is 20% more than the seller paid.

Closing Agent

The closing agent is often employed by the title company, although in some cases they may be an employee of the lender, an attorney, or an attoryney that represents the lender. State law determines which types of professionals can servve as settlement agents, with some states having much more restrictive requirements that others such as, in some states, attorneys must handle closings. The responsibilities of the closing agent include: -Coordinating the closing process -Verifying transaction amounts -Ensuring all parties to the transaction (borrower/buyer, seller, etc) have copies of forms and disclosures required for settlement -Verifying identity of parties and notarizing documents -Discussing closing requirements with parties to the transaction including fees, dates, funding, recission, etc. *The settlement agent may be responsible for providing the Closing Disclosure to a consumer on the creditor's behalf. The settlement agent must also be identified on the Disclosure. Parties have the right to give power of attorney to another individual and may not be present at closing and all documents and disclosures prepared for closing may be signed before a notary and returned to the loan originator. If the trasaction seems suspicious, it is advisable for the loan originator to alert the office manager or underwriter and contact an attorney to determine what legal obligations they may have to report suspected fraud to banking regulators or other enforcement authorities. Reports go to the Financial Crimes Enforcement Network (FinCEN) which will involve the FBI if appropriate. The Closing Instrument: In the US, mortgage loans are completed differently depending on if located in a lien theor or title theory state. In lien theory states, the closing instrucment for a lending transaction is a mortgage; in title theory states, the security instrument is a deed of trust. When the security instrument is a mortgage, the signature of the borrower is required. When the instrument is a deed of trust, the lender is named on the deet as the beneficiary and the borrower signs as the trustor or grantor. The trustee is also identified in the deed of trust. State law may require additional signatures. For example, if the home securing the loan is located in a state that is community property state, the signatures of both spouses are required, regardless of whether both parties are legally obligated to repay the loan. Other types of state laws are also relevant such as dower and curtesy laws, which protect the interests of a surviving spouse. In lien theory states, lenders require additional signatures to protect against a legal claim that has priority over a mortgage lien. In title theory states, lenders want signatures from both spouses on the deed of turst to ensure the entirely property serves as security for the loan. Some lenders may have a policy of requiring sigantures of both spouses, even if the home is not located in a state with laws protecting spousal interests. Lending laws do not prohibit lenders from refusing to offer mortgage credit when a borrower's spouse refuses to sign the security agreement. Loan originators should explain that requesting a spouse's signature on the mortgage or deed of trust does not obligate the spouse to repay the debt;- it simply protects the lender's interest in the case of a default. Power of Attorney: POA is a legal document that an individual uses to authorize another to act on their behalf. When a borrower is unable to attend a closing, use of a POA ensures the transaction can proceed. Fannie Mae provides guildelines for the use of a POA with conventional loans, stating that an individual holding a POA may sign the mortgage or deed of trust and the promissory note, provided that all of the following conditions are met: *The POA -Is valid at the time the loan documents are signed -Is notarized -References the address of the property involved in the transaction *The lender complies with state law requirements, such as a requirement to record the POA with the mortgage or deed of trust. Indivuals who may serve as the borrower's agent or attorney in fact include a spouse, child, other individuals related by blood, adoption or legal guardianship, and a fiance or domestic partner. The agent or attorney in fact may not be: -The loan originator -The lender or an affiliate or employee thereof -The title company or an affiliate or employee of the title company that provides title insurance for the home securing the loan -A real estate agent with a financial interest in the transaction Freddie Mac has established similar guidelines for uses of a POA. Following both of these guidelines is critical to ensuring the GSEs will purchase a loan with closing documents that were signed by a POA. For nonconventional loans, such as FHA and VA, there are some addition requrements that lenders may need to meet and are outlined in the HUD Handbook and in VA lending regulations. Some states require the use of a specific form when granting POA to another individual and use of an incorrect form can prevent closing from taking place. Closing agents and lawyers strongly discourage the use of POA forms found online as they can be innacurate. In order to avoid problems, it is imperative to complete and notarize the correct form prior to closing. Lenders will not acccept a POA form that was signed too far in advance and that files to cite details that link the POA to a particular transaction. Required Documents When Using Property as Collateral: In purchase transactions, it is important to be certain that the buyer will possess the property with a clear title. In both purchase and refi transactions, it is critical for the lender to search the title of the property used as collateral in order to identify liens and encumbrances. An appraisal is required for transaction involving a home purchase. For some refis new appraisals are not required. When refinancing a conventional loan, the need to have an appraisal may depend on whether the borrower will get cash back. Transactions for nonconventional loans offer products that do not require a new appraisal. The FHA's streamline refinance program does not require an updated appraisal. VA refinances, known as interest rate reduction refinance loans (IRRRL), do not require a new appraisal. Lenders will not refinance a loan without a new title search. Explanation of Fees and Documents: While the closing agent's responsibilities include the duty to provide a comprehensive explanation of closing documents and related fees, the borrow should not be hearing these for the first time at settlement. An originator should include full disclosure and discussion of all fees and obliations with the borrower. The Loan Estimate (October 2015) is used to facilitate a loan applicant's understanding of the costs of a lending transaction. Originators should remind loan applicants that the disclosure is for their benefit and encourage them to read it and ask questions. In some states mortgage brokers are responsible for ensuring that its individual loan originators./employees are carrying out fiduciary duties including acting in the borrower's best interests, following the borrower's lawful instructions, disclosing all material facts to the borrower and using reasonable care in the performance of duties. Making certain that borrowers understand the fees they are paying and the documents they are signing is one way in which a mortgage broker and its loan originators can make certain that they are disclosing material facts to the borrower and uisng reasonable care in performing the duties asociated with loan origination. Failure to provide open and honest communication about fees other obligations may constitute careless or even predatory and unethical mortgage origination. Providing a comprehensive and accurate explanation of all fees ensures that a mortgage professional is meeting obligations under RESPA, TILA and other consumer protection laws. Neglecting to do this can place a mortgage professional at risk for violating disclosure requirements of these federal laws as well as state and federal laws pertaining to deceptive trade practices. Title Insurance Fees: In some states, the borrower will pay the costs for both the lender's title insurance and owner's title insurance. In other states the seller will pay title insurance fees, or responsibility for title insurance costs may be negotiated between the borrower and the seller. Escrow Expenses: They allow funds to be set aside and made available for future payments of loan related expenses, such as taxes and mortgage insurance. Sometimes the borrower will be required to have an escrow account; for others, maintenance of an escrow account is optional. The lender uses the money in this account to make insurance and tax payments during the life of the loan. This can make the total due at closing higher, as the borrower must have the account funds available at that time. Origination Fees: This is the amount that borrowers pay to creditors for the work performec to carry a transaction to completion. Factors like processing fees, underwriting fees and related charges. The amounts that can be charged as origination fees vary depending on type of loan. Such as limitations apply for origination fees collected on VA loans. Funding: Generally, funding occurs after the recordation of documents ith purchase transactions and refis invollving investment property. Funding practices vary from state to state. If a refi involves a PR, the loan will fund after the 3 business day recission period, provided the borrwer does not rescind. The lender usually wires funds to the closing agent who is responsible for disbursing funds to the appropriate parties according to the Closing Disclosure. Payoff statements related to mortgages and judgements and liens are generally provided to the title company by the lien holder or judgement creditor. *If the transaction involves a refi to allow the borrower to pay off debt, the borrower generally verifies amounts by providing the most recent bill statements. The closing agent must make the check payable to the party to ensure that the lender's interest is protected. Disbursements and payoffs may include payments to the following: -First mortgage payoff -Second mortgage payoff -HELOC payoffs -Tax payments -Municipal charges -Creditors -Lender fees -Broker fees -Judgments and liens Wet Settlement: This is when the parties meet to execute documents and afterwards, funds are disbursed. In this case lenders involved in purchase transactions are required to ensure that the closing agent has funds with which to close. Dry Settlement: When the parties meet to execute documents, but funds are not disbursed. The parties are made aware that the funds are not disbursing and the property will not be conveyed until certain conditions are satisified. Some state recordation statues even require that the mortgage or deed of trust be recorded prior to disbursing funds. Table Funding: Allows a broker to originate and close a loan under their name. At the time of closing, the loan is transferred to a lender who provides the fund for disbursement. This tpycally occurs when a broker has correspondent lender status or is access a line of credit for the purposes of closing the loan. Reconveyance: In states where deeds of trust are used in mortgage loan transactions the borrower conveys title to the property to the trustee (typically a title or escrow company). The trustee then holds title for the lender. Once the borrower has repaid the debt in full, they are able to take back title to the property. Lender markes the note paid in full and delivers it to the borrower along with the deed of trust, which is also marked paid in full or cancelled and has been cancelled at the courthouse or register of deeds. This removes the trust, and the trustee no longer holds the title, which has been conveyed to the homeowner.

Appraisal Approaches

The most common method of conforming loans is the sales comparison approach, or market approach, based on comparison with similar, recent property sales in the same vicinity as the subject property. The cost approach is commonly used to appraise new home construction. The income approach is used for investment properties. When an appraisal is completed, the appraiser must justify the use of one apprach over the others in their final conclusion of value. Sales Comparison Approach: An analysis of recently sales that are the most comparable to the subject property and must includ a minimum of 3 comparable sales that were settled within the last 12 months. Appraiser must commend on sales that are more than 6 months old. Adjustments to Comparable Sales: Appraiser's analysis must take into consideration all factors that have an impact on the value. To accomplish this, the appraiser must analyze all closed and settled sales, contract sales, and current listings of properties that are the most comparable to the subject property. The appraiser must exercise diligence to ensure that the comparable sales data is reliable. Specific guidelines have been set for adjustments regarding proximity to subject, date of sale, and net or gross adjustmentents: -Proximity to the subject property; located within one mile of the subject -Date of sale; comparable sales should have closed within 12 month of appraisals effective date -Net & Gross adjustment; are changes in the value of a c property when comparing the features of the comparable property to the subject -Sales or financing concessions; dollar amount of sales or financing concessions paid by the seller such as interest rate buy downs, loan discount points, loan origination fees and closing costs customarily paid by the buyer. The appraiser must obtain this information. The dollar amount from the concessions is adjusted negatively in the sales grid. Sales concessions are limited on conforming loans based on LTV. Transaction with LTV greater than 90% are limited to 3% seller concessions and loans with LTV lower than 90% are limited to 6%. Rural Properties: Due to rural properties be situated on large logs and rural neighborhoods can be relatively underdeveloped there may be a shortage of recent comparable sales in the immediate vincinity of the property. Because of this the appraiser will often need to select comparable sales that are located a considerable distance from the subject property and should include an explanation in the report of why the particular comparables were selected in his or her analysis. Cost Approach: The appraiser arrives at the indicated value of the property by estimating the reproduction cost of improvement, subtracting the amount of depreciation by all causes and adding the estimated value of the site as if it were vacant. Land is estimated by analyzing comparable sized land sales. Income Approach: This approach is not tpyically applicable to single family properties. However, if it is being utlized as an investment property, the appraiser must prepare a single family comparable rental schedule in addition to the appropriate appraisal report.

Tangible Net Benefit

This refers to the benefit that a consumer will attain as a result of a transaction. The practice of loan flipping resulted in mortgage professionals being able to collect excessive fees from consumers who were ultimately sadddled with the resulting expenses. Some states even use a tangible net benefits worksheet. Congress has not adopted a "catch all" tangible net benefit rule. It attempts to discourage loan flipping and similar practices in transactions for high cost mortgages by restricting the number of refi's a creditor may make within a set period of time unless the refinancing is in the consumer's best interest prohibiting refinances withint one year of making a high cost mortgage unless it is in the borrower's best interest. See Scenarios beginning on page 299.

Title and Insurance

Title Insurance: A creditor must be certain there are no liens, judgements or other mortgages on the property which could take a priority interest over its own. A clear title is also important. A consumer needs to know that there are not any pre-existing liens, encumbrances or title defects that may affect the homeownership or personal liability. A title search can also verify whether the borrower is obtaining a title from the owner of record. There are 2 main differences between title insurance and othe types of insurance. Title insurance protects against events that may have happened in the past, while other forms of insurance, such as homeowner's insurance provide protection from future events. Also, with title insurance, there is only a one time insurance premium paid at loan closing while other forms of insurance typically require ongoing payments of premiums. Title insurance is regulated by state agencies and the Department of Housing and Urban Development. Title insurance companies offer title insurance to lenders and to home purchasers. Lender's insurance protects lenders. Consumers are not required to have title insurance, but when purchase a new home, consumers should consider the benefits. It is known as "owner's insurance" and may protect against many potential liabilities including mechanic liens (filed by contractors when homeowners fail to pay for materials or improvements), unreleased mortgages, zoning violations, tax liens and other legal concerns related to prior ownership of the property. Preliminary Title Reports and Commitments: This is a report issued by a title company related to a request to issue a title insurance policy. It lists information related to existing liens, easements, defects, restrictions and any other applicable encumbrances that may cloud title or be exceptions to coverage when the policy is issued. A Title Commitment allows the tital insurance provider to information the involved parties of any known conflicts and encumbrances affecting the property and commit to issuing title insurance when specified requirement have been met.

Closing

Title and Insurance: The title provides evidence of conveyance of an individual's transfer of ownership of property to another individual. This informational must be recorded in public records in order to privde a clear lineage of the ownership and transfer of a property. A deed, which is a written agreement transferring property from one person to another, is an example of information that affects title and must be properly recorded. The title company is a key player in the loan origination and settlement process providing information and services relevant to a property's title. They may also provide the legal description of property that is needed for a loan application. Their responsibilities being with a title search performed by an attorney or abstractor. This search is an examination of county or municipal records to determine the legal status of th eproperty. Items that an abstrractor will search for include easements, unpaid tax liens or mortgage liens. This results in a title abstract which is a report contining the history (or chain) of title associated with the property. Once it is determined that any title issues do not exist or have been cleared, the title company will issue a title binder, which is a commitment to issue an actual title insurance policy.