Loan officers, attorneys and borrowers alike should take notice when loan document notice requirements change. Loan officers and attorneys need to know to appropriately advise and guide their clients. Borrowers should know the rules of the process to be, well, smart informed consumers.
Federal Law has required for many years disclosure forms be provided to consumers by lenders. In an effort to eliminate inconsistency, overlapping language and confusion to consumers, lenders and settlement agents, the Consumer Financial Protection Bureau was directed to integrate longstanding loan mortgage disclosure forms under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) (78 FR 7973, Dec. 31, 2013) (TILA-RESPA rule), into two understandable (hopefully) consolidated forms. They are the Loan Estimate and Closing Disclosure.
The Loan Estimate is designed to give disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying.
Timing: Upon receipt of an application by a mortgage broker or a lender (referred to in the rule as a “creditor”), this form will be provided to consumers within three business days after they submit a mortgage loan application. An “application” for these purposes consists of the consumer’s name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought.
Even if the mortgage broker provides the Loan Estimate, the actual lender remains responsible for complying with the all requirements concerning provision of the form.
What’s in it? This document provides you with the general terms of your loan. Things like loan amount, interest rate, if it is a fixed or adjustable rate loan and the sales price if the loan is financing the purchase of a property or apartment. It clearly identifies what the monthly principal and interest payments are, if there is a prepayment penalty and if a balloon payment is due at the end of the loan term. It clearly provides the monthly payments of property and hazard insurance being collected by the lender which when combined with the monthly installments of principal and interest, comprise your total monthly payment.
On another section of the form, it itemizes a borrower/purchaser’s closing costs and informs the consumer the amount of money that a consumer needs to close that particular transaction.
The form further provides the consumer a five (5) year comparison on the amount of principal, interest, mortgage interest and loan costs that will be paid. It also discloses how much of the original principal is paid down during the first five years. As previously disclosed in the TIL, the APR * (see below) is identified and the borrower is told the amount of interest paid over the life of the loan.
* APR (annual percentage rate) is the interest rate of your loan after deducting certain closing costs (points, mortgage broker fees, and other charges that you have to pay to get the loan). Because the APR is calculated based on a smaller amount of money, all other things being constant, the interest rate contained in the note is usually higher.
Replaces: The Good Faith Estimate (AKA, GFE) designed by the Department of Housing and Urban Development (HUD) under RESPA & the “early” Truth-in-Lending disclosure designed by the Board of Governors of the Federal Reserve System (Board) under TILA.
Fee limitation: Generally, consumers cannot be charged any fees until after they have been given the Loan Estimate and have communicated their intent to proceed with the transaction. One exception to that is that consumers can be charged fees to obtain their credit reports prior to the issuance to the Loan Estimate.
Early estimates and disclaimers: Consumers can be provided written estimates prior to application as long as there is a disclaimer provided to prevent any confusion with the Loan Estimate. Disclaimers are required for advertisements as well.
The following disclaimer needs to be clearly and conspicuously placed at the top of the front of the first page of the estimate in a font size that is no smaller than 12-point font: “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.” (12 CFR Part 1026 § 1026.19(e)(2)(ii)).
Below is a sample of a Loan Estimate:
The Closing Disclosure is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction.
What’s in it? Like the Loan Estimate, it provides the consumer with the general terms of your loan, the loan amount, interest rate, if it is a fixed or an adjustable rate loan and the sales price if the loan is financing the purchase of a property or an apartment.
It sets forth the monthly principal and interest payments, if there is a prepayment penalty and if a balloon payment is due at the end of the loan term.
The document discloses monthly payments (projected calculations in years 1-7 and in years 8-30 of the loan term) of property and hazard insurance being collected by the lender which when combined with the monthly installments of principal and interest, comprise your total monthly payment.
Much like its predecessor the Hud-1 Settlement Statement, the Closing Disclosure itemizes in separate columns, the costs of both the purchaser and seller and identifies between costs that are paid at and before closing. What differs from the Hud-1 is that this form has a separate column for costs paid by others (i.e. bank paid mortgage tax).
Similar to its predecessor, the Truth In Lending Disclosure Statement as well as the Loan Estimate, it provides the consumer the APR of the loan, the amount of the loan after deducting the payment of upfront loan closing costs as well as the total amount of the interest paid over the life of the loan.
At the end of the loan, it provides a contact sheet for the names of the lender, its loan officer and the settlement agent. I think this is very useful.
This is a link to a Guide to the Loan Estimate and Closing Disclosure forms: (http://goo.gl/vu1eF9) which sets forth the content of the Loan Estimate and Closing Disclosure forms.
Timing: This form will need to be provided three (3) business days before consumers are to close on a mortgage loan.
Replaces: The current form used to close a loan, the HUD-1, which was designed by HUD under RESPA.
It also replaces the revised Truth in Lending disclosure designed by the Board under TILA.
Changes: If between the date the Closing Disclosure is given and the date of Closing significant changes occur to:
- the APR (above 1/8 of a percent for most loans & 1/4 of a percent for loans with irregular payments or periods);
- to the loan product, or
- if a prepayment is added to the loan-
the consumer must be provided a new form and an additional three (3) -business-day waiting period after receipt of the new form.
A revised Closing Disclosure form can be issued at or before closing showing less significant changes, without actually delaying the closing.
Unless an exception applies, charges for the following services cannot increase: (1) the lender’s or mortgage broker’s charges for its own services; (2) charges for services provided by an affiliate of the lender or mortgage broker; and (3) charges for services for which the lender or mortgage broker does not permit the consumer to shop. Charges for other services can increase, but generally not by more than 10%, unless an exception applies.
The exceptions include, for example, situations when: (1) the consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the lender; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the lender generally must provide an updated Loan Estimate form within three business days.
Following is a sample form Closing Disclosure Form:
The TILA-RESPA rule applies to most closed-end consumer mortgages. It does not apply to all cash transactions (no financing is involved), commercial purpose loans, home equity lines of credit (HELOCs), reverse mortgages, mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The final rule also does not apply to loans made by individuals, estates or trusts lending five or fewer mortgage loans per year. The new disclosures are used when a mortgage loan application is taken on the implementation date of October 3, 2015.
A wealth of information and forms on this topic is located on the Consumer Financial Protection Bureau website located at:
Compliance guide (link): A plain-language guide to the new rules in a FAQ format which makes the content more accessible for industry constituents, especially smaller businesses with limited legal and compliance staff.
Guide to forms (link): Provides detailed, illustrated instructions on completing the Loan Estimate and Closing Disclosure.
Closing Fact Sheet (link): An overview of the limited circumstances when changes to the loan require a new three-day review.
Disclosure Timeline (link): Illustrates the process and timing of disclosures for a sample real estate purchase transaction.
Integrated loan disclosure forms & samples (Link): Downloadable Loan Estimate and Closing Disclosure forms in both English & Spanish and samples for different loan types.