Chapter 5: Loans: Finance Disclosure & Other Real Estate Disclosures

1. Chapter 5: Loans: Finance Disclosure & Other Real Estate Disclosures By Dr. D. Grogan M.C. “Buzz” Chambers

2. Preview The purpose of this unit is to familiarize the learner with the legal regulations governing required disclosures in a transaction for a real estate loan. The American Association of Residential Mortgage Regulators (AARMR) http://www.aarmr.org/ address the need for shared information at state agency level

3. Federal level laws • The Federal Truth-In-Lending Act (TILA), referred to as Regulation Z • www.occ.teas.gov/handbook/til.pdf • The Real Estate Settlement Procedures Act, known as "RESPA“ • www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm • Regulation X, called Reg X • www.federalreserve.gov/bankinforeg/regxcg.htm • Home Mortgage Disclosure Act (HMDA) • www.hmda.net • The Home Mortgage Disclosure, Regulation C • www.ffiec.gov/hmda/RegC.htm

4. Student Learning Outcomes Indicate the components of the Federal TILA, HMDA, Regulation Z, Regulation C compliance requirements. Describe APR. Discuss the elements of federal HUMDA RESPA provisions, Regulation X. List California disclosures used for a real estate loan transaction. Distinguish between federal and state laws involving the loan broker and the loan originating lender.

5. 5.1: Federal Law Enforced by the Federal Reserve Board. 1. Applies to all federally-related mortgage loans that meet certain requirements. Loans must be: Truth-in-Lending Act (TILA) - Regulation Z • made by any federally-regulated or insured lender. • made, insured, guaranteed, supplemented or assigned by a federal agency. • in connection with a housing or urban development program administered by a federal agency.

6. 5.1: Federal Law TIL-Reg Z (Cont.) d. intended to be sold on the secondary mortgage market to FNMA, GNMA, FHLMC or other financial institution that will do so. e. made in whole or in part by a creditor making or investing in residential real estate loans totaling more than $1 million per year. f. originated by a dealer or mortgage broker g. the subject of a reverse mortgage created by any maker of mortgage loans specified as above.

7. 5.1: Federal Law TIL-Reg Z-Purpose to promote the informed use of consumer credit by requiring disclosures about its terms and cost. to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. to give consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling. to regulate certain credit card practices. to provide a means for fair and timely resolution of credit billing disputes.

8. 5.1: Federal Law TIL-Reg Z-Purpose (Cont.) It imposes limitations on home equity plans and credit where the finance charge is payable by a written agreement in more than 4 installments. Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission requirements, and advertising. Subpart D contains rules on oral disclosures, Spanish language disclosure in Puerto Rico, record retention, effect on state laws, state exemptions and rate limitations.

9. The Federal Reserve regulations amended TILA • The requirement that the loan cost disclosures must now be that: • The borrower must be given AT the time of loan application, OR within three days of loan application. • The borrower must be given the disclosure BEFORE any fees are incurred, except a reasonable credit report fee. • This is a change from BEFORE credit is extended. • This regulation puts limitations on “higher priced loans. • This regulation prohibits deceptive loan advertising. • Amended May 2009: requires at least a SEVEN (7) days period between loan application date and closing date. • http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf

10. Home Ownership and Equity Protection Act (HOEPA) Requires special disclosures and substantive protections for home-equity loans and refinancing with APRs or points and fees above certain statutory thresholds. In 2007 the Federal Reserve Board proposed rules under HOEPA for higher-priced loans to prohibit certain unfair or deceptive lending and servicing practices in connection with closed-end real property loans. The final rules in July 2008 require creditors to provide consumers with transaction-specific disclosures early enough in the transaction to be able to use the information to shop for a loan.

11. Mortgage Disclosure Improvement Act of 2008 Implemented the final rules for the timing of the disclosures for closed-end real property loans. Loans secured by dwellings, even when the dwelling is not the consumer’s principal dwelling, requires a waiting period between the time when the loan disclosure fees are given and when the loan may be consummated specifically to allow consumers time to check loan fees with other loan providers.

12. 18 Reg Z Disclosures Identify of creditor Amount financed Itemized amount financed Finance charge APR Variable rate Payment schedule Total of payments Demand feature Total sales price Prepayment penalty Late fee Security interest Insurance Security charges Contract terms Assumption fee Require deposit statement of billing rights

13. 5.2 APR Consumer Credit Protection Act (TIL) requires APR disclosure. APR combines interest rate with other loan costs APR gives prospective borrower a standardized figure to compare financing from different sources. The Good Faith Estimate (GFE) statement of settlement costs must be provided within 3 business days of loan application. The servicing disclosure statement must be given in writing when the lender expects that someone else will be collecting the loan payments. Affiliated business arrangements must be disclosed.

14. APR Lenders are required to make 4 disclosures: 1. Amount financed—the amount of credit provided to the borrower. 2. Finance charge—the total dollar amount the credit will cost the borrower during the life of the loan, including interest, borrower prepaid discount points, loan fees, loan finder fees, loan service fees, required life insurance, and mortgage guarantee premiums. 3. APR—the cost of credit 4. Total payments—the amount in dollars the borrower will have paid after making all the payments as scheduled. This amount does not include actual payments made during the life of the loan, which may include late fees or other costs.

15. Federal Law the Home Equity Line of Credit booklet must be provided to the borrower at or before submission of the loan application, or when a nonrefundable fee is paid, whichever is earlier. Home Equity Loans Adjustable Rate Loans • the Consumer Handbook on Adjustable Rate Mortgages must be provided to the borrower at or before submission of the loan application or when a non-refundable fee is paid, whichever is earlier. Reverse Mortgages • the disclosures must be made at least three days before closing.

16. For All Loans • Truth-in-Lending Disclosure Statement must be provided to the borrower within three days of the loan application. • a. Statement includes the interest rate to be charged, including up-front loan costs, computed as the annual percentage rate (APR) to be paid. • b. The APR does not include fees for a credit report or property appraisal. • c. To estimate a loan’s APR, 1% of a loan paid up-front = 1/8% increase in interest rate paid over life of a loan. • All loan charges must be included in the final statement at the time of closing. • At closing, the borrower is informed of the three-day right of rescission available on an existing loan 1) refinance or on a home 2) equity loan taken out after a home purchase, 3) but not on a purchase money loan. • TILA enforced by the Federal Reserve Board

17. 5.3 Section 32 Loans • Applies only to refinance of loans secured by the borrower’s principal residence and: • APR Test: If the APR on the TIL exceeds the Treasury security rate by 10% or more; or, • Points & Fees Test: If the points & fees exceed 9% of the amount financed • Includes: original fee, points, processing fee, doc prep fee, courier fee, escrow fee, underwriting fee, tax service fee, recording fee, flood certification, PMI & impounds

18. 5.4 Federal RESPA, Reg X • Enforced by HUD • Purpose: • Provide borrower with likely costs of the loan • Help consumers become better shoppers • Eliminate kickbacks and referral fees that increase the cost of services • Limit impound accounts

19. Real Estate Settlement Procedures Act (RESPA) 1.Requires lender or mortgage broker to disclose any affiliated business arrangement with an individual or entity offering settlement services. 2. Special information booklet (Buying your Home: Settlement Costs and Helpful Information) within three days of loan application.

20. Real Estate Settlement Procedures Act (RESPA)-continued b. requires disclosure of the following fees:    i.      Loan origination fee (Points)                    ii.      Appraisal fee                    iii.      Credit Report fee                    iv.      Tax service fee                     v.      Underwriting fee                    vi.      Escrow closing fee                   vii.      Title insurance viii. Loan processing fee ix.      Appraisal review fee x.      Recording fee xi.      Document fee xii.      Application fee xiii.      Beneficiary demand fee xiv.     Miscellaneous fee, including courier, notary, messenger and express mail fees. 3. Good Faith Estimate of settlement service charges must: a. be provided at loan application or within 3 business days.

21. Real Estate Settlement Procedures Act (RESPA)-continued 4.  Servicing Disclosure Statement Required if someone other than lender or mortgage broker will be servicing the loan. Must be provided at, or within three business days of, loan application. NEW HUD-1 form as of Jan 1, 2010

22. HUD-1 (3 page) form Page 1: Section J are borrower’s costs; Section K are seller’s transaction costs Page 2: Section L: Borrower funds paid at close of escrow; Seller funds paid at close of escrow Page 3: Comparison of GFE to HUD-1; Charges that in total cannot increase more than 10%; Charges that can change; Loan terms

23. HUD–1 Settlement Statement May inspect one business day before closing Includes disclosure of lender-paid broker fees Escrow Account Statement a. No more than two months of excess payments b. Accounting provided within 45 days c. Annual review of escrow account • www.hud.gov/fha/resrespa_hm.html.

24. 5.5 Home Mortgage Disclosure Act (HMDA) Reg C (only for originating lenders Not mortgage brokers) 1. Identify lending patterns 2. Comply with regs issued by: The Board of Governors Federal Reserve System 3. Lender must collect data on loan applications each calendar year and report findings. 4. Data must be available by March

25. HMDA report 1. A number for each application 2. The type and purpose of loan 3. Owner-occupied status 4. Amount of the loan 5. Property location with census tract and county code (no street address) 6. Race or national origin of borrower and co-borrower 7. Sex of borrower and co-borrower 8. Income relied on in processing the application 9. Investor code for the entity purchasing the loan

26. Credit Card Accountability, Responsibility & Disclosure Act (CARD) Implemented Feb 2010. Set limits on interest rates and fees. Credit card statement must include more information on the extent of the debt. Ban on hiking interest rate on existing balances. Under age 21, person must show they are sole support of themselves.

27. 5.6 Government loan disclosures: FHA Addendum to URAR, 1003 loan application Notice to home buyer that FHA does not set the property value or interest rate. Assumption notice Informed consumer choice disclosure Real estate certification FHA identity of interest certification

28. 5.6 Government loan disclosures: DVA Addendum to URAR, 1003 loan application VA debt questionnaire Interest rate & discount statement Federal collection policy notice Assumption of VA-guaranteed loan Borrower acknowledgment of disclosures Counseling checklist for military homeowner

29. 5.7 State Law A. Usury Law - California Constitution Article 15 1. Proposition 2 exempts loans made or arranged by real estate broker and secured by real property. 2. Federal Law exempts federally-related residential first mortgage loans. 3. Seller financing of real property is considered an extension of credit, and not a loan, for the purposes of the usury law. 4. Usury Law Maximums: a. Consumer loans – 10% (non-purchase, construction, real estate) b. Goods, purchases, business -10% or Fed. Reserve discount rate + 5% c. Maximum rate of Federal Reserve Bank discount rate plus 5% on business loans.

30. State Law Applies to every real estate broker who negotiates a loan to be secured directly or collaterally by a lien on real property. Statement must include estimated maximum loan costs and expenses to be paid by the borrower. Total brokerage fees or commissions. Any liens against the real property. Estimated amounts to be paid on the order of the borrower, such as fire insurance. Estimated balance of loan funds to be paid to borrower. Principal amount of loan and Rate of interest. Name of real estate broker. Terms of prepayment privileges and penalties. B. Mortgage Loan Disclosure Statement

31. State Law 1. DRE-provided form 2. Meets both state and federal requirements C. Good Faith Estimate (MLDS/GFE)

32. State Law 1. Provided to private and small pension trust lenders/investors as soon as practicable before investor becomes obligated to purchase or make the loan. 2. Three separate forms available from DRE for: a. loan origination b. sale of an existing note c. or collateralized loan. D. Lender/Purchaser Disclosure Statement (LPDS) E. Creative Financing Disclosure Law • 1. Requires that on all seller carry-back loans seller and buyer must be given written • disclosures on residential 1-4 unit properties, including: (Mortgage Broker not usually • involved in this-Real Estate brokers are. • Balloon payment Notice of Default • Negative amortization Senior loans • Credit report Warning on pitfalls of all-inclusive deed of trust (wrap-around deed of trust).

33. 5.8 California non-loan disclosures Appraisal Credit & fair lending Death or AIDS Earthquake Energy conservation retrofit & thermal insulation Environmental hazards Fire hazard (State responsibility) Flood disaster Foreign Investment in Real Property Tax Act (FIRPTA) (Cal-FIRPTA) Government Hazard insurance

34. 5.8 California non-loan disclosures Language of the contract Lead-based paint Local option Supplemental property tax Mello-roos Methamphetamine-contaminated property Pest control Real estate owned (REO) Smoke detector Title insurance advisory Transfer disclosure statement (TDS) Utility line extensions Water heater bracing Lender/purchase statement

35. 5.9 Other loan disclosures • Article 7-used for small loans • Broker discloses written statement within 3 days of loan application • Broker to retain copy for 4 years • www.DRE.CA.GOV/forms RE 851A • Prepayment penalty-amount charged for paying off a loan in advance of the due date. • Deduct 20% from current unpaid loan balance • Multiply by interest rate, then divide by 2

36. 5.9 Other loan disclosures Liability-borrower may be liable if they do not disclose current outstanding liens Loan terms: 3 categories • Due date under 3 years • Due date under 6 years • Loan amount < $30,000 for lst; < $20,000 for 2nd Maximum charges: Actual charges or 5% of principal loan amount, not to exceed $700, excluding loan fees

37. 5.10 Predatory Lending Law Disclosure Prohibited loan terms Prohibited practices Penalties & Corrective Action • Balloon Payments • Name and address to whom the payment must be made • The due date • The estimated amount that will be due • The terms of a refinance, if any • The amount of all interest, principal, and charges due between the date of the notice and the due date, assuming all payments are made until payoff

38. 5.11 Good Faith Estimate (GFE)Non-traditional loans • Allows borrower to defer repayment of principal or interest • Secured by 1-4 unit residential property • May be an interest-only loan • Result in negative amortization • Does not include RAM or home equity loans • DRE Form 885: • Page 1: compensation to the broker • Page 2: used if initial adjustable rate box is checked