Residential Mortgage Lending: Principles and Practices, 6e

2. Residential Mortgage Lending:Principles and Practices, 6e Chapter 15 Closing and Delivery; Quality Control and Fraud

3. Objectives • After completing this chapter, you should be able to: • Describe the different steps and responsibilities involved in a mortgage loan closing • Understand the different closing fees and settlement services involved • Understand the different regulatory restrictions and guidelines that govern federally-related mortgage loan closings • Explain the various ways that loan closing can be handled and by whom • Understand the required documentation and their purpose for the closing and delivery of a typical mortgage loan • Understand the dynamics of funding and delivery for portfolio and for secondary market mortgage loans. • Describe the different types of mortgage fraud and their source • Identify different red flags to help identify or prevent mortgage fraud • Explain the purpose of quality control and the typical QC program characteristics

4. Loan Closing • Formulating, executing, and delivering all documents required to create an obligation to repay a debt and to create a valid security instrument, • Disbursing the mortgage funds, and • Protecting the security interest of the lender or investor (e.g., recording), • Establishing the rights and responsibilities of the mortgagor.

5. RESPA Requirements • Good Faith Estimate of likely settlement service charges (provided within 3 business days of application), • Notice of Servicing Disclosure (signed at application), • Lender to provide the HUD booklet, "Settlement Cost and You", • Use of a HUD settlement sheet, • Limits on escrow (or impounds) accounts.

6. Closing a Residential Mortgage Loan 1. Advise applicant of loan acceptance with a commitment letter (and, if applicable, set rate, terms, etc.). 2. Order final title report (and survey, if separate) and any other documents or verifications still outstanding. 3. Schedule closing and prepare closing documents. 4. If applicable, obtain appropriate IRS Form 1099-B information (and report to the IRS) or withhold appropriate funds at closing. 5. Conduct closing, obtain all required signatures, and disburse funds. 6. Record mortgage. 7. Return all closing documents to mortgage lender for inclusion in loan file. 8. Review closing and file documents for post-closing quality control. 9. If applicable, deliver required documentation to investor. 10. If applicable, receive funding from investor.

7. First Mortgage Checklist • First mortgage loan - Conventional program - Government program - Other • Equity loan - Closed-end second - Line of credit

8. Note and Mortgage Document Requirements • All blanks on uniform instruments must be completed. • All corrections on forms must be initialed by the borrowers. • No correction fluid or tape can be used on the documents. • Documents should contain original signatures. • Names of signers must be consistent through all documents, and signatures • should be the same as name. • Legal description and property address should be consistent throughout • and agree with title policy. • Note and security instrument should be signed on same date. • Signatures should be notarized according to state requirements.

9. QUALITY CONTROL AND FRAUD PREVENTION • Quality control programs have two main objectives: 1. Detect and help minimize production and closing errors. 2. Detect and help minimize mortgage fraud.

10. Mortgage Fraud • Sections 1001-1040 of Title 18 of the United States Code prohibit lying to or concealing information from a federal government official. • When applicants make false statements or submit falsified information during a federally related mortgage application.

11. What Do You Think? • Identify the reasons why residential loan closings are so important to the parties involved. • What are the steps in closing a residential mortgage loan? Who normally handles the closing?

12. What Do You Think? • Why is a commitment letter so important to proper mortgage lending? • What is the purpose of title insurance? Who is protected by title insurance? • Why does the Internal Revenue Service need to be informed about a loan closing?

13. What Do You Think? • Describe the different types of mortgage fraud. • What federal areas investigate mortgage fraud? • Why is quality control an important aspect of mortgage loan production? • What recent steps are lenders taking to improve quality control?

14. Check Your Understanding • The closing of a mortgage loan should not be interpreted to mean that the end of the mortgage-lending process has been reached. • The purpose of loan closing is to ensure that the loan is closed according to federal laws and not state law. • Most mortgage lenders do not use a commitment letter to inform an applicant that their application has been accepted. • The most common method of reviewing legal title and providing protection to mortgage lenders is through the purchase of title insurance. • It is important that mortgagors understand that they are not protected under the lender’s policy against any defects in their title to the real estate.

15. Check Your Understanding • The amount of title insurance should be equal to the estimated value of the real estate. • Names of signers must be consistent though all documents and signatures should be the same as name. • Signatures do not have to be notarized if the loan is “federally related”. • HUD-1 (or HUD-1a) is a requirement of RESPA. • If the mortgage transaction is a purchase money mortgage IRS requires real estate brokers to file an informational return showing the gross sales proceeds of the transaction.